British evaluation of central bank quantitative easing says it's now a core part of monetary policy, meaning public trust in and understanding of QE is important

British evaluation of central bank quantitative easing says it's now a core part of monetary policy, meaning public trust in and understanding of QE is important

By Gareth Vaughan

Quantitative Easing (QE), the so-called unconventional monetary policy response to the COVID-19 crisis from the Reserve Bank of New Zealand (RBNZ) and other central banks, is likely to be with us for years to come, according to a review of the Bank of England's QE approach.

The review comes from the Independent Evaluation Office (IEO), an independent unit that sits within the Bank of England (BOE) to assess its performance.

Like the RBNZ, the BOE embarked on a QE programme in response to the COVID-19 pandemic during 2020. But unlike the RBNZ, the BOE first launched QE 11 years earlier in response to the Global Financial Crisis. The IEO report notes that, with QE having been rolled out in a range of countries around the world over the past decade or so, and stepped up again in response to COVID-19, it's no longer merely an unconventional crisis response tool. Especially against a backdrop of persistently low inflation and low interest rates.

"Overall, QE has transitioned from being a transient, unconventional crisis response, to a persistent part of the monetary policy toolkit. With structural factors putting continued downward pressure on equilibrium interest rates globally, Bank Rate [the BOE equivalent of the Official Cash Rate] is more likely to come up against its effective lower bound in the event of economic shocks. QE is therefore likely to continue to play a key role in the monetary policy toolkit for years to come," the IEO says.

"The objective of QE is to provide monetary stimulus, helping the MPC [BOE's Monetary Policy Committee] to meet its inflation target. If the MPC projects inflation to fall below its 2% target, it can use QE to boost demand in the economy, and hence inflation. At a high level, QE involves buying assets from the private sector – financed by the creation of central bank reserves. That is intended to lower longer-term interest rates and, in turn, encourage spending on goods and services, boost economic activity and employment and put upward pressure on prices."

The IEO evaluates BOE QE between 2009 and 2016.

"In 2009, the MPC began a programme of QE, through the Bank’s Asset Purchase Facility, intended as a temporary measure to support the economy in the aftermath of the crisis. But a decade on from its introduction in the UK, QE has become bigger, broader and more persistent than expected. That is why in 2019 the Bank’s Court commissioned this evaluation of the Bank’s asset purchase programme. And, although not a key focus of this report, the further expansion of QE in 2020 as the MPC responded at pace and scale to the COVID-19 crisis, has only made this review more timely."

'There is understandably not a settled collective view on exactly how QE works'

The IEO notes that more than a decade on open debates about how QE works continue, alongside discussion about its broader inter-linkages and its potential limitations. These debates are not surprising, reflecting limited knowledge about a relatively new tool, the IEO says.

The report highlights a lack of published material on the BOE’s collective view on QE.

"...We heard that there was not much agreed material to draw on when writing about QE in official publications such as the MPC minutes. In part, this may reflect the fact that there is understandably not a settled collective view on exactly how QE works."

Amid mounting concerns that QE may exacerbate wealth and income inequality by pushing up house and share market prices, Governor Adrian Orr in December said the RBNZ will probe the impact of loose monetary policy on inequality. Since the onset of the COVID-19 crisis the RBNZ has cut the Official Cash Rate to a record low of 0.25% and is targeting up to $100 billion of government and local government bond buying in the secondary market by June 2022 via a QE programme. At the time of writing this QE, known as the RBNZ's large scale asset purchase programme, had reached $44.2 billion.

On the issue of QE impacting wealth or income inequality, the IEO report doesn't draw a firm conclusion. It does note, however, that the public is likely to find the impact of QE in pound-terms on the income or wealth of different groups to be a more intuitive distributional benchmark than the percentage impact.

"In pound-terms, the rich appear to benefit more from QE. But the percentage impact suggests a fairly even impact across the income distribution. Publications that focused on standard measures of inequality, which emphasises the percentage impact, were criticised by some that we spoke to. But the Bank typically presented its analysis in both terms," the IEO says.

"Some market practitioners also thought the Bank should do more to understand the financial stability risks from QE, including via its impact on banks, pension funds and asset valuations. One practitioner noted that this was a potential blind spot for most central banks."

The report goes on to say that much of the academic literature on QE focuses on its impact on financial conditions, including interest rates, corporate credit spreads, bank funding costs and other asset prices.

"There is a broad consensus that QE programmes successfully lowered government bond yields and eased financial conditions across jurisdictions, albeit to varying degrees. A number of papers assess these impacts by applying an ‘event study’ approach, looking at the immediate reaction of government bond yields and wider asset prices to announcements about QE. In the UK, QE1 purchases of £200 billion, which were around 14% of nominal GDP at the time, led to an estimated fall in 5–25 year gilt yields of around 100 basis points overall," the IEO says.

Supporting jobs & wages

The IEO also points to a Petersen Institute for International Economics survey of 24 QE studies across jurisdictions, which suggests that for QE purchases worth 10% of domestic Gross Domestic Product (GDP), the median reductions in the 10-year government bond yields in the UK, US and euro area were between 45 and 55 basis points. At $100 billion, RBNZ QE would reach about 31% of New Zealand's GDP.

"In the UK, Bank of England analysis suggests that the initial £200 billion of QE during 2009–10 may have increased GDP by 1.5%–2% and inflation by 0.75%–1.5%. Later this finding of a significant impact of QE on both activity and inflation."

Additionally the IEO notes a Becker Friedman Institute survey of 54 QE studies across jurisdictions finding that when averaging across the studies, QE purchases worth 10% of GDP are estimated to increase the level of output by 2.4% and prices by 1.9% at their peaks.

The IEO says a BOE staff working paper from 2018, described as its most comprehensive and impactful work on this topic, suggests the overall effect of monetary policy and QE on standard measures of income and wealth inequality has been small, because while QE supports asset prices, it also supports jobs and wages.

"While international evidence on the impact of unconventional monetary policies on inequality is mixed, the paper’s conclusions are in line with the prevailing consensus that looser monetary policy reduces inequality by supporting employment," the IEO says.

PR advice

The IEO also has some thoughts on central banks improving their public relations around QE. With QE now a core part of the monetary policy toolkit, the IEO argues the public’s trust in and understanding of the tool is important for a central bank's mission.

"External stakeholders also recognise that communicating about QE is challenging. It is a complex tool. QE relies on indirect transmission channels via financial markets and has a less direct impact on retail financial products such as mortgages than Bank Rate".

"The potential distributional effects of QE are the key area of contention. Bank work suggests that the overall effect of monetary policy and QE on standard measures of income and wealth inequality has been small. But by reducing long-term interest rates, QE – alongside the more general low rate environment – is seen by many to hurt savers," the IEO says.

"Meanwhile to the extent that QE raises the prices of assets, ownership of which is fairly concentrated, many worry that it increases inequality. Consistent with this, text analysis shows that the share of UK press articles about QE that discuss it in the immediate context of distributional words (eg ‘savers’, ‘the rich’, ‘inequality’) has increased markedly since 2011. The share hit around a third of QE articles after a speech by Theresa May in 2016 criticised the distributional impacts of QE."

The IEO advises that rather than explaining QE in terms of ‘injecting’ or ‘printing’ money, central banks could frame QE as a continuation of conventional monetary policy that pushes down long-term interest rates to support the economy.

"This is a more intuitive description of the QE transmission mechanism ... and provides a simple story of how QE works, using concepts more familiar to the public. Framing QE as a change in an interest rate rather than the creation of a quantity of money may also reduce the perception that QE is a transfer of wealth to the rich or to banks," the IEO suggests.

The report goes on to say that this could include a greater focus on the macroeconomic impacts on economic activity, inflation and especially jobs.

"Ideally, this would be grounded in real world examples. In early communications, the Bank’s desire to show that QE was having an impact led to a focus on asset prices – a key initial part of the transmission mechanism. This fuelled the perception that QE chiefly helps those holding financial assets."

The IEO says its evaluation was largely done between December 2019 and October 2020, having been commissioned to cover QE from its inception to 2016 – the year of the last round of purchases at that time.

"While the evaluation was in train, the MPC voted to expand purchases further in response to the severe downturn associated with the COVID pandemic. The IEO does not comment on live policy decisions. But we have drawn on the experiences of the most recent round of purchases, particularly where there has been clear learning from previous episodes or where issues that we had previously identified were brought into sharper relief."

*This article was first published in our email for paying subscribers early on Wednesday morning. See here for more details and how to subscribe.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


(Comment unrelated to story removed, Ed. Please see our commenting policy here -


QE is a game changer in NZ. We'll look at back at 2020 and know QE was the ignition of inequality, with further QE bringing inequality out of control.

RBNZ will no doubt get better with their PR to disguise this mess from your average Joe Blogg.

Income inequality has been rising in NZ since about 1994. Perhaps QE will increase it further (this has yet to be seen) but it's certainly not the start of income inequality.

See Section D.

Agree its not the only factor. But certainly a driver (a big one) and Yet to be seen? Need to disagree here.

QE Creates instant inflation pressure to the basic cost of housing (also cap assets in general).

Devalues savings and the value of the money that I earn, if I am not an asset owner and my ability to earn is all I have.

Said inflation benefits cap asset holders only (equities, housing) the more assets, the more benefit.

And looking overseas, say UK, US etc since GFC, Its done bugger all to increase real wages, which have in no way at all risen in proportion to the basic cost of living. I mean housing.


'Trust' is a strange word, Gareth. I think this criminally reckless monetary stimulunacy will be excoriated in the histories to be written of the coming Great Collapse of the Western command economies.

I think the IEO here is being more than mischievous. You can't just change the language to change the reality of how QE with current monetary policy has led to a huge bubble in asset prices that had advantaged the rich, and the sting in the tail is now coming with CPI, particularly food and basic costs, inflation, that will further disadvantage the poor and those who've lost their economic lives through Covid.

Signed: hollowed out saver now having to chase return for ludicrous risk, or resign myself to having to work until I die at my desk. Financial markets are detached from price discovery totally, and are broken.

Mark.. well said.

Well said. This reckless and shortsighted ultra-loose monetary policy is extremely dangerous and it will reveal itself for the big mistake it really is. The pity is that, like in all Ponzi schemes, the latest fools to buy into the NZ housing bubble will be, sadly, the ones who will pay the biggest price, once things inevitably revert to a new equilibrium.

Yep, classic Emperor's new clothes stuff - "if you can't see the genius of mmt, you're stupid"

QE in an attempt to increase economic activity and raise inflation to a healthy level has instead seen interest rates falling to near zero. Favouring borrowers/lenders and not savers. Robbing Peter to pay Paul. Spreading the pain and concentrating Wealth. The tragedy is that it was supposed to be a temporary help the ravaged economies after GFC but has become an easy fix for any economic adversity. The American Investment Bankers have made sure that they are the winners for decades ahead. And the Rich One Percenters are not complaining.

Because what we need is *another* blunt and ineffective tool in the economy management toolbox?!? The objectives of QE would be met more elegantly by setting interest rate on bank reserves at, say 0.5%, and then signalling commitment to keep long term bond yields at, say 1% (and only swapping cash for bonds when absolutely necessary to achieve this aim). This would heavily influence inflation (through forward pricing channel) - far more directly than playing the dumb ass interest rate game where we pretend that fiddling with interest rates drives private sector appetite to borrow / invest which (according to folklore) drives inflation.

QE is free money for the rich - but that’s another story.


Look at the top three comments on this thread. Look at #FinTwit.

We all understand exactly the harm of this reckless experiment in monetary policy over the last 12 years, and it's effects: I'm waiting for the day for one central bank governor to own up to it.

And goodness me, forget Biden: we've got Powell in the Fed and Yellen in the Treasury. That's bring economic doomsday forward rather rapidly.

Mark.. yes and in our culture of identity politics the biggest talking point about Yellen will be that she is a woman.

Mark - the trouble being thay didnt have a choice.
It was crash then or crash later.
Everyone chooses crash later.

Agreed. But the early crash is simply called the correction of malinvestment and is good - it recycles capital from old stale firms to new innovative firms (those firms that were bailed out in 2009 should have gone under). The crash you kick down the road this far is human misery and a societal changing event. The central banks have been reckless beyond words: our undoing as always will be hubris.

Possibly the biggest error - of many - central banks made was the belief they've grown into that they had to stop even recession. Recessions have a crucial (good) function in capitalist economies. They correct continually the distortions and malinvestments that have built up.

Mark..yes I think Taleb explained it well in one of his books in conjunction with his too big to fail warnings.

Mark... I agree to.
Minskys idea that long periods of stability leads to instability.., come to mind
I think it is a Political error as much as a Central Bank error...

Forward guidance like that only works if you do not have a history of changing your mind Willy nilly (For example by saying LVRs are gone till at least May and then bringing them back earlier than that).

Are we not just merrily going down the same road as Japan, i need to read more about Japan.

I think this could get very ugly for us it's not like we have a Toyota/Sony, Nissan etc, Being locked in a no growth economy for decades would be one of the worst outcomes.

Lets imagine houses slow their capital gain to just %10 a year, doubling every 7 years, rents go from $500 pw to $800 , we all would need to be on 100k a year just to make ends meet. Some things are just impossible.

Somehow I don't think we will have record house prices living in a Japanese low interest environment.

'They Keep Assuring Us Japan Can't Happen Here'

'An important caveat to our results is that the BOJ move toward negative rates may itself have reflected deteriorating economic conditions. Therefore the changes in the market’s expectations could have been responses to that deterioration rather than to the policy change.'

Are we not just merrily going down the same road as Japan.....

In some ways, By actually dealing with deflation, I think the Japanese are in a better situation than the English-speaking nations in particular (whose arrogance knows no boundaries). The Japanese believed their own BS, which is not unlike what is happening elsewhere today (NZ being a prime example).

I think we are very much heading towards a low/zero-growth situation. Which would be OK, if we weren't going into it with massive levels of debt and unrealistic expectations.
Japan actually has an advantage: they went into their period of zero growth *after* a crash in asset values. We're going into it with enormous private debt obligations, largely to overseas banks, which they will expect to see repaid regardless.

Great point about how Japan went zero growth after crash in asset values. I'd not thought of that. West will be going into zero growth on inflated asset values funded by huge level of debt: so when assets do correct, we're in much greater trouble.

Massive bankruptcies ahead ?

In northern hemisphere bankruptcies are already massive, and they're not abating anytime soon. If interest rates do go up - look at pressure on treasury yields - bankruptcies will skyrocket: Russell Small Cap will be decimated.

Japan actually has an advantage: they went into their period of zero growth *after* a crash in asset values. We're going into it with enormous private debt obligations, largely to overseas banks, which they will expect to see repaid regardless

I hear you. Also important to note, despite low growth, Japan has remained the leading creditor nation in the world. They're still incredibly productive and responsible for much of the infrastructure and manufacturing development across Asia. Furthermore, re their massive public debt, this is all owed to themselves.

Japan had the luxury of a growing world economy around them over the last 30 years.
This ensured supply chains ticked over.

No one now has this luxury - including Japan.

Zero growth doesnt work for long (in a fiat money system)
Interest requires growth.
And thats ignoring diminishing returns in resource bases ....

As the owner of fixed assets I welcome the relentless debasement of FIAT currency that Reserve Banks are pursuing. The interesting thing to me is that people continue to use these currencies daily when they are plummeting in value.

We need something like a currency backed by a global ETF holding every asset class to replace conventional currencies.

One option is a basket of currencies that is weighted proportionally to their international importance to be used for international trade. True this still largely consist of USD, but then at least no country can print money and export their inflation like the US does, just because it is the global reserve currency. Raoul Paul of Real Vision has some great ideas on this.
But you know what would be better? A mathematically programmed system that has a set emission rate and that cannot be tampered with by central bankers when they fee like printing money, ergo devaluing everyones savings. If only more people saved in Bitcoin.

Like Special Drawing Rights?

Sounds like Libra, which I thought was a good idea. I wouldn't touch it because I loathe Facebook, but if it was managed by human beings rather than a malevolent humanoid robot, it'd be a natural long-term safe asset.

We could alternatively... Stop QE, let the global recession have its impact on our waaay over leveraged housing debt, and then focus on a more sustainable path moving forward.

The answer to stagnent or backwards pressures cannot always be "soooo... Well just print more money????"

at some point the systems Structure needs to be evaluated.

As an asset class housing is 'too big to fail' within New Zealand unless productivity measures improve.

There is Cryptocurrency called Reserve which aims to do this in future

How may one buy that, pray tell, thanks.

'The argument that the US can continue to increase the debt-to-GDP by 10%-20% per year without economic and social consequences seems to hinge on the fact that the three other developed economies with higher debt-to-GDP ratios than the US still exist (Greece, Italy, and Japan).

A detail that always seems to get forgotten in that comparison is that all three have witnessed zero/negative GDP growth ever since exploding their national debts meaningfully beyond 100%.'

Everything about this article is awful and depressing, but 'kind of' addresses necessary agenda that needs to be undertaken for the technocrats and ruling elite to garner support from the great unwashed. They need us all onboard. Regardless, most people are either too busy or have zero interest in trying to understand QE. All I ask is that the retail banks remove any smug, conceited, or porcine leaders from their boards or at least don't let them near the media. In my mind, that's just rubbing the public's face again and again.

Free money people! yay
Buy hard assets... What's the downside?

Congratulations on an article which opens up the basis for a lot more discussion. The data used by the Independent Evaluation Office (IEO) from within the Bank of England (BOE) is essentially from earlier times through to 2016. And so it is rear vision mirror stuff - as is so much formal economic analysis. The current levels of QE are much greater now than then. Although there is much that is still to be understood about QE (including within the Central Banks themselves) there should be no doubt that it is super effective in lowering interest rates. It is the consequent effects thereafter that are the big issues that need a lot of analysis and debate.

I'm not sure if it does open up the discussion. The communications and language surrounding central banking is exactly what Franz Kafka envisioned. Furthermore, you talk about 'formal economic analysis' but look at the complete lack of behavioral economic understanding within these frameworks. The absence of it is almost frightening given the greater realization in the commercial and technology worlds that the aggregate attitudes and behaviors are what drives economics as opposed to top-down monetary control. Audaxes' post below alludes to what I'm saying: all this money printing that is having no effect on consumption and price inflation.

We are in agreement in relation to the importance of behaviour. In relation to economics, the behavioural context became apparent to me way back in 1973 when I first visited China with my kitbag of economics and science principles. The science principles worked but the economics principles did not work, because I had moved to a different behavioural context which had not been part of my formal education.
As for consumption levels, my own assessment is that fiscal policy (wage subsidies) has been very successful in the last year. In contrast, I tend to the view that the RB monetary policy does stimulating house construction but is counter -productive in other important ways.
As for inflation, the RB monetary polies have surely stimulated asset inflation. With consumer price inflation, the jury is still out, but lagged stagflation is something I do give a lot of thought to.
So, although I do not align with the BOE, I do congratulate Gareth for his contribution here in opening up these issues.

Keith: I suspect stagflation is that special rung of hell our economies are headed for. And Keynes had no answer for that.

I think we need to be bold and thinking of paradigm change out of central banking: it was hubris always, and how its consequences now play out is frightening. Especially for those of us putting our minds to trying to retire.

Keynes was a very clever man. He would have understood that his own prescriptions were specific to his times.
His prescriptions for the current times would have almost certainly been somewhat different and tailored to these current times.
My guess is that he would have argued against over-reliance on monetary tools such as QE, but that he would have been comfortable with short-term fiscal deficits to counter COVID impacts, with those short-term deficits funded through bonds, more of which stayed in the market rather than purchased by the RB. In relation to forthcoming stagflation (at this stage sill somewhat over the horizon), I think he would have said 'what else would you expect in an ongoing environment of loose money?'.
Keith W

Didn't some Nobel Laureate get the Nobel for such a study of Behaviours driving policies/practices ?

"The objective of QE is to provide monetary stimulus, helping the MPC [BOE's Monetary Policy Committee] to meet its inflation target.

For the trillions in bank reserves, there has been and is no inflation. In the financial media, it’s everywhere; in data, it’s not just absent, rarely has it ever been this absent. The calculation is and always has been simple enough: money printing, real money printing, actually does lead to sustained rises throughout a broad, widespread swath of consumer prices. Therefore, if there is no inflation, there can’t have been any money printed.

According to the BLS, using the CPI, which is more inflation-y than the Fed’s preferred PCE Deflator, the headline index rose 1.36% year-over-year during December 2020, up from 1.17% in November on the strength of the crude price rebound feeding somewhat into gasoline (just as TIPS investors have bet). Other than that, core consumer prices (excluding food and energy) rose 1.62% last month. Link

QE is just part of a money go round. When the government deficit spends it creates reserves in the banking system, bonds are then issued to lower these reserves and QE then reverses this process and returns the reserves back to the banks again. The original source of the money was always from the governments spending. Only taxation can destroy money that the government has created. Economist Prof Bill Mitchell explains here that governments don't even need to issue debt.

by Audaxes | 15th Jan 21, 4:32pm
The government issues bonds to remove reserves from the banking system that its spending has created and QE returns them back again, it never finances the government.

What happened before QE when sovereign debt was still being issued?

Good question!
The Government still printed money but without an independent RB things were less transparent. Prior to the mid 1980s it was also an era of fixed foreign-exchange rates plus very strict import controls. On my first visit to Australia in 1972 I had to visit the then Government-owned Bank of NZ and justify my need for some Australian dollars which were provided as travellers cheques. It was a different world! The wage-price spiral started about 1970.

The Government still printed money...

In my day in the 1980s my London based US bank purchased US government IOUs via its NY primary dealer in the form of coupon bearing bonds sold at auction and credited the US Treasury account (TGA) at the Fed. In fact we financed the whole NY operation with fungible Eurodollar credit created out of thin air without direct central bank oversight. Chemical bank had a single NY branch facing the public and nothing else. It was a wholesale off-street inter-bank operation - known in London as the bankers' bank. There were no Fed reserves.

I am still wondering when I would get my Helicopter Money in my account. America is far ahead in this respect. Grant Robertson, better do something quick.

These debates are not surprising, reflecting limited knowledge about a relatively new tool, the IEO says.

What a complete load of BS. The Romans were among the first to devalue their currency with QE by shaving off edges of the gold and minting new coins.

Hard money and assets are where the market is moving, and the market always wins. These central banks are thought leadering their way out of a mandate. Fiat is fast becoming a sh*tcoin.

I was listening to a US commentator and his narrative is along the lines of - once the general public really understands how QE works and it’s consequences then there will be riots on the street and violence. Those with money to invest into appreciating assets, without taking on extraordinary high of debt will do very well. When those that can’t, realise that they are getting poorer with all their income going towards rent/mortgage food then expect them to react. QE leads to massive increases in debt and a transfer of wealth from one section of society trying to get ahead to another. Won’t be a very pleasant experience.

QE once started you cannot stop pause maybe

True. It is a serious addiction, acquired very quickly. The world has been on it since 2008. Thanks the Investment Bankers who were in the influential positions in the US who convinced/pressured the Treasury to start it.
Now many western economies are addicted. Detoxing is not that easy. Like the drug dealers, the 1% is making the money on this addiction.

'Looser monetary policy reduces inequality'. Hmmmmm

"QE. It was a significant shift to move the focus of monetary policy from a short-term interest rate (Bank Rate) to a quantity of purchases (QE). Establishing and communicating the economic rationale for QE – which is to stimulate the economy by lowering longer-term interest rates – has not been straightforward. "

This quote from the IEo report shows what QE is/was all about. ( to me )

Because Central Banks have no direct control over long term rates, they can only influence them thru "quantity of purchase" . ie stepping into the mkt to purchase so many , that yields fall ( long term rates ).

That still left the problem that even with low long term interest rates , Central Banks cant force Banks to lend and people to borrow.

The responses to covid 19 have been different . Ray Dalio describes it as Monetary Policy 3 ( MP3). MP3 gets money directly into the economy whereas QE mostly increased Reserves held with the Central Bank, with Private Banks not increasing private sector lending.

An example of MP3 in NZ might be the FLP programme where the RBNZ lends Money directly to banks at .25% for 3 yrs..