The Bank of England not only kept interest rates on hold at its Thursday meeting, it also reaffirmed its commitment to quantitative easing, creating £75bn of new money to be spent largely on government bonds. The policy is unsound, as I wrote last Tuesday, in that it will misallocate resources in response to the false signals it sends out.
The error has been compounded by buying government bonds. This drives up the price and lowers the return on them. Pension funds, which move deeper into bonds as their members approach retirement, thus achieve lower returns on their investments, and pay reduced pensions in consequence. If the £75bn bung were used to buy corporate paper, it would still be wrong, but would at least have raised company shares, their asset base and their credit-worthiness.
The minor piece of good news is that the Bank may hold back on the second wave of its printing until its May or June meeting, giving it time to assess what effect the April 22nd Budget might have. It also gives it time to see if the dreaded deflation is indeed rearing its head, or if it must instead start looking to counter all the inflation pumped in.
