The explanations of the purpose of QE and its method working have changed over the years of its use. In the second quarter of 2009, explaining why it had embarked on a large £200 bn programme of QE, the Bank said:
“The introduction of large scale asset purchase using central bank money or QE shifted the focus toward the quantity of money as well as the price of money. Injecting more money into the economy should boost spending….the more that households and companies use the new money to buy goods and services or other assets, the more it will raise spending. If banks use the additional reserves to expand their lending, the impact could be even stronger. ”
This explanation was altered by July 2012 when the Bank published a further explanation of QE:
“the objective remained unchanged – to meet the inflation target of 2%…without that extra spending in the economy, the MPC thought that inflation would be more likely in the medium term, to undershoot the target….It does not involved printing more banknotes. Furthermore the asset purchase programme is not about giving money to the banks. Rather the policy is designed to circumvent the banking system”.. to “stimulate spending and keep inflation on track”
Inflation rose above 3% early in 2010 and stayed above 3% until early 2012, rising above 5% at one point. The MPC would presumably say their timing of asset purchase was related to their forecasts of inflation post 2012. Clearly if their use of QE in 2009, and in 2011 and 2012 was about inflation it was not about accurate forecasts of 2010-12 inflation but must have been about something longer term. Perhaps they “looked through” the higher inflation brought on by the devaluation of sterling.
Today more people say the aim was merely to bring down longer term rates of interest, to make it cheaper to borrow long term. They see QE as an elaborate way of altering the price of long term money compared to short term loans. Perhaps the Bank’s first explanation that it was to try to inject cash into the economy to be spent is nearer the mark.
What is more interesting is the change of stance on unwinding the position. In the early days it seemed likely that first the Bank would stop new purchases, then allow repayments of debt to cancel the outstanding gilts as they matured, and then sell back the remainder before raising interest rates. Now the agreed policy is to raise the official short term rate before taking any steps to reduce the amount of bonds held. This has the perverse consequence of losing money on the bond holdings at market prices, if the Bank raises the official rate and that has the normal impact on the value of gilts.