THE Bank of England has admitted its huge quantitative easing programme and loose monetary policy contributed to the surprise boom in equity prices last year.
Shares rallied strongly between March and December 2009 after governor Mervyn King pumped £198bn into the financial system through gilt repurchasing, commonly referred to as “printing money”.
The hefty stimulus, designed to reflate the economy and encourage banks to resume lending to businesses, was accompanied by a cut in interest rates to 0.5 per cent in the spring.
The FTSE100 took market participants unawares after the savage downturn, gaining around 25 per cent in the second quarter alone. Analysts at the time said the BoE’s emergency liquidity was filtering through to asset prices rather than being used to supply credit to British enterprises as intended.
In its latest quarterly bulletin, the BoE has recognised for the first time the connection between the unexpected rise in equity prices and the level of funds it poured into the economy. The report said the measures it took were likely to have pushed down on government bond yields and improved earnings expectations for equities.
“Market contacts have suggested these policy actions by central banks and governments are likely to have prevented more severe downside risks from emerging,” the document added. However, it said: “The impact of recent unprecedented actions cannot be precisely quantified.”
The BoE said recovering market confidence and the return of equity risk premia to normal levels after the financial crisis were also factors.
Meanwhile, the quarterly bulletin revealed the strains of quantitative easing have pushed the BoE’s balance sheet to its largest size since the end of the Second World War. Assets and liabilities now amount to around 17 per cent of the UK’s GDP, the highest level since 1945.
The BoE said its balance sheet would shrink as monetary policies were unwound. It said the recent expansion was a “necessary response” to “extraordinary circumstances in global financial markets”.