BoE Urged To Consider Equity Purchase For Further Stimulus
Several experts in the UK have suggested that the central bank, the Bank of England (BoE) should explore the possibility of buying stock as a stimulus measure in case the recent raft of credit measures to boost economic growth has no effect.
Last week, the BoE announced four key policy decisions in abid to stop a recession in the UK in the aftermath of the Brexit vote. It cut interest rates to 0.25 per cent, restarted its quantitative easing (QE) and announced plans to start a Term Funding Scheme as well as to buy corporate bonds. The Term Funding Scheme is aimed at ensuring that lenders transfer the benefits of the rate cut to consumers.
Under the scheme, banks can borrow from BoE at rates close to the bank rate for four years to the extent of 5 percent of their outstanding stock.
Many believe that such traditional monetary stimulus measures are reaching the limit of their effectiveness and there might be a need for new tactics such as buying stocks. In a statement, Ed Smith, an asset allocation strategist at investment management firm Rathbones said,
It would have a better impact on confidence. Sovereign-debt and investment-grade markets have been so distorted that people no longer look at them as a measure of outlook for the economy, while equities still show a future growth outlook. A floor [for equity prices] might instill greater confidence.
Eric Lonergan, manager of the £822 million Episode Growth fund at M&G said that buying equities was an option especially when the private economy is reluctant take risk. The Bank of Japan has been one of the central banks to have used this strategy to boost growth. It has been buying equities for the past six years through exchange-traded funds.
Smith however put the possibility of BoE adopting this measure at just 25 percent saying the institution was wary of the risk involved in investing into equities since it could boost asset prices without impacting growth.
There are others who believe that the BoE still has ample room in managing the gilt market. Axa Investment Managers senior economist David Page said that central banks in other markets went through the route of buying stock since there were market constraints which is not the case with the BoE.
Lonergan also pointed out that ultimately the decision on the measures that will be deployed will depend on the fiscal policy of the government.
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