Ten years ago, before the onset of the global financial crisis and the great recession, bond traders spent their time worrying whether the world’s main central banks would raise interest rates by a quarter of a percentage point.
Rates were around 4% in the US and the eurozone, and 5% in the UK. Then a series of banking failures that culminated in the collapse of Lehman Brothers in September 2008 brought those halcyon days to a close as central banks rushed to cut rates to close to zero.
Given the severity of the downturn, central banks would have liked to cut rates even further to provide extra support for the economy. However, cutting rates below zero is not feasible as it means central banks paying investors to hold funds.
Instead, they had to resort to unconventional monetary policies, and this included quantitative easing (QE) – where central banks buy specific amounts of fixed-income or other assets to stimulate the economy and increase liquidity.
Here is a brief history of QE in the US, Europe and the UK:
- November 2008 – The US Federal Reserve (Fed) starts buying US$600bn in mortgage-backed securities, primarily to tackle problems in the sub-prime housing market. By the end of the programme, it had bought US$2.1tn of assets.
- March 2009 – The Bank of England launches QE, initially buying £165bn of gilts (UK Treasury bonds) and ultimately purchasing £435bn after five other interventions.
- November 2010 – The Fed announces a second round of QE that becomes known as QE2, purchasing US$600bn worth of Treasury securities and US$250bn–US$300bn in treasuries from the profits of the previous investments.
- September 2012 – The Fed has to fall back on QE for the third time. With QE3, it sets out a monthly approach for purchases instead of buying in bulk. The initial budget was US$40bn a month, rising to US$85bn by December 2012.
- May 2013 – Former Fed chairman Ben Bernanke tells the US Congress the Fed will at some point start to reduce its asset purchases. Bond yields spike and equity markets fall on worries that a less aggressive monetary stance will hurt the economy and profits.
- October 2014 – The Fed stops buying bonds and plans to start selling back those it bought under QE. It has accumulated US$4.5tn of assets by this point.
- January 2015 – The European Central Bank (ECB) starts QE with €60bn a month of assets, initially corporate bonds but then eurozone bonds from central governments, agencies and European institutions.
- March 2016 – ECB raises its programme to €80bn in March 2016 and has so far bought €2.4tn.
- September 2017 – The Fed announces its programme to shed bonds. This begins with US$10bn a month in October 2017, rising to US$50bn in 2018 and continuing at that pace.
- June 2018 – The ECB says it will end its asset purchase programme in December, tapering monthly purchases from €30bn in September to €15bn from October until December.
- June 2018 – The Bank of England announces it could start to sell the £435bn of assets it bought to boost the economy sooner than previously thought. It plans to wind down its asset purchases when interest rates reach around 1.5%, compared with previous guidance of around 2%. The current rate is 0.75%, but the bank is forecast to raise rates by a quarter point every six months, therefore unwinding may not start until after 2020.
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The full version of this article appears in the Q3 2018 print edition of The Review. All members, excluding student members, are eligible to receive the quarterly print edition of the magazine. Members can opt in to receive the print edition by logging in to MyCISI, clicking on My account, then clicking the Communications tab and selecting ‘Yes’.
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