In an analysis of the effectiveness of Fed and BoE QE programmes, the BIS argues that a significant reduction in bond yields has been achieved. However, the BIS then goes on to say that additional asset purchases are likely to run into the problem of diminishing returns, concluding that “central bank asset purchases are unlikely to replace conventional interest rate policy in normal times“.
The impact of recent central bank asset purchase programmes, BIS Quarterly Review, Dec 2011
The Bank of England’s announcement in October 2011 of a fresh round of QE (adding £75bn of bond purchases to the £200bn purchased in 2009-10) was seen as a precursor to possible credit easing later in the year (see QE plus, The Economist, 8 Oct 2011).
Despite scepticism about liquidity traps, the Bank of England has argued that balance sheet expansion is a worthwhile tool… “If we compute the range across the different estimation methods, using the middle of the ranges of the bottom-up estimates, this would suggest that QE may have raised the level of real GDP by 1.5% to 2% and increased inflation by between 0.75 to 1.5 percentage points.”, The United Kingdom’s Quantitative Easing Policy: Design, Operation and Impact, BoE Quarterly Bulletin, 2011 Q3.
Last year, US negative real interest rates, rebounding equities and the sinking US$ also supported an optimistic view…. The Fed’s big announcement: Down the slipway, The Economist, 4 Nov 2010.
However, as time progressed many argued that the “shock-and-awe” factor was missing and that renewed pessimism about growth prospects and international co-ordination might limit QE effectiveness. The spotlight has turned on governments, rather than the beleaguered central banks, to take leadership and make the tough calls.
A conference hosted by the St Louis Fed in June 2011 further explored the impact of QE.