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MPC decision to extend quantitative easing - expert comment

Professor Roger Farmer (Warwick Economics) comments on the Bank of England Monetary Policy Committee decision to extend the quantitative easing programme and keep interest rates at 0.1 per cent:-

"The MPC announced that it would maintain interest rates at 0.1 per cent and that it would continue to buy government bonds, but at a rate smaller than the market expected. As a result, yields on longer bonds rose by 3 basis points.

"The impact of bond buying depends on the maturity and type of the bonds that the Bank buys. If all of the purchases are at the short end of the yield curve, Quantitative Easing has no effect at all on either inflation or unemployment. When the Bank pays interest on reserves, QE is simply substituting interest bearing reserves for interest bearing gilts in the portfolios of savers.

"The fact that yields on longer maturities rose by three basis points suggests that the Bank is in part, intervening at the long end of the yield curve and that the market expects those interventions to slow down. In my view, it is a mistake to allow yields on long bonds to increase in the current economic climate."

19 June 2020

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