Next Central Bank Puts QE Unwind on the Calendar

The end of an era spreads.

Markets were surprised today when the Bank of England took a “hawkish” turn and announced that three out of nine members of its Monetary Policy Committee – including influential Chief Economist Andrew Haldane, who’d been considered dovish – voted to raise the Bank Rate to 0.75%, thus dissenting from the majority who kept it at 0.5%. This dissension, particularly by Haldane, communicated to the markets that a rate hike at the next meeting in August is likely. The beaten-down UK pound jumped.

But less prominent was the announcement about the QE unwind. Like other central banks, the BoE heavily engaged in QE and maintains a balance sheet of £435 billion ($577 billion) of British government bonds and £10 billion ($13 billion) in UK corporate bonds that it had acquired during the Brexit kerfuffle.

Before it starts shedding assets on its balance sheet, however, the BoE wants to raise the Bank Rate enough to where it can cut it “materially” if needed, “reflecting the Committee’s preference to use Bank Rate as the primary instrument for monetary policy,” as it said.

In this, it parallels the Fed. The Fed started its QE unwind in October 2017, after it had already raised its target range for the federal funds rate four times.

The BoE’s previous guidance was that the QE unwind would start when the Bank Rate is “around 2%.” Back in the day when this guidance was given, NIRP had broken out all over Europe, and pundits assumed that the BoE would never be able to raise its rate to anywhere near 2%, and so the QE unwind could never happen.

Today the BoE moved down its guidance about the beginning of the QE unwind to a time when the Bank Rate is “around 1.5%.”

The Fed’s target range is already between 1.75% and 2.0%. The Fed leads, other central banks follow. And by August 2, the BoE’s Bank Rate may be at 0.75%. From that point forward, the QE unwind may only be three rate hikes away.

“Any reduction in the stock of purchased assets will be conducted at a gradual and predictable pace,” it added, very Fed-like.

The thing is, there’s an inflation problem in the UK. Inflation has been above the BoE target of 2% since February 2017, hitting 3% and beyond for five months in a row late last year and early this year. This has squeezed real household incomes (adjusted for inflation), crushed the savings rate, and hampered consumer spending.

The BoE tolerated this after the Brexit referendum. But recently it has gotten nervous about it. And now it’s time to do something. The BoE’s statement on consumer price inflation:

CPI inflation was 2.4% in May, unchanged from April. Inflation is expected to pick up by slightly more than projected in May in the near term, reflecting higher dollar oil prices and a weaker sterling exchange rate.

And its statement on wage inflation, which is what central banks are really allergic to:

Most indicators of pay growth have picked up over the past year and the labour market remains tight, suggesting that domestic cost pressures will continue to firm gradually, as expected.

This is how it fits into the “ongoing tightening”:

The Committee’s best collective judgement remains that, were the economy to develop broadly in line with the May Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target [down to 2%] at a conventional horizon.

And then, when it explains what this means for the future, there appears the Fed’s favorite word again, “gradual”:

All members agree that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.

The BoE is the second major central bank that has put the QE unwind on its schedule, after the Fed has already plowed ahead with it. By contrast, the ECB is still engaging in QE, but has been tapering it, and will end it this December, with rate hikes likely to begin next year. But a QE unwind won’t be on its schedule until after’s Draghi’s shelf life expires in October 2019.

Gone are the kid gloves at the Fed. Read…  This Fed Grows Relentlessly More Hawkish

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  67 comments for “Next Central Bank Puts QE Unwind on the Calendar

  1. Sporkfed says:

    With wealth inequality at an all time high, won’t the move to
    higher rates increase the wealth gap ?

    • Gershon says:

      The central banks exist for one purpose: to concentrate all wealth and power in the hands of their oligarch masters. Wealth inequality is a measure of their success, not something they see as undesirable.

    • Wolf Richter says:


      Well, maybe not. Because asset prices decline when rates go up. Bond prices by definition decline when rates go up, and many other assets that are priced on yield, such as commercial RE, also tend to experience declining prices. Eventually, stocks will get hit. And savers, who are often less than super wealthy, would make more money. So actually, rising rates will likely shrink the wealth gap by making the wealthy a little less wealthy.

      • Lenz says:

        The only way this increases the wealth gap is the assumptions that when stocks drop, generally companies will tighten up to squeeze more margin. Will mean more layoffs and higher productivity. So some vulnerable poor people will be effected, but it is a healthy thing so hope the rates continue trending up.

        • alex in san jose AKA digital Detroit says:

          Capitalism is operating as designed.

          Unfortunately the oligarchs always want more, more until the 99% go all French Revolution on them.

      • Tom Kauser says:

        The City is raising the rate band against the dollar due to recent dollar squeeze. The giant sucking sound became uncomfortably deafening?

    • Bobber says:

      Well, it depends on what you call wealth. Higher rates will likely decrease stock prices and reduce the “wealth effect”. Higher rates also reduce bond prices. However, people who hold fixed income investments will get more annual return.

    • Tim says:

      look up ‘capitalization rate’, and maybe you’ll get the picture.

  2. John says:

    Well,if the BIS says “JUMP”-central banks will jump.

    If the BIS says “KEEP JUMPING”-central banks will keep jumping.

    And it applies to FED too.

    “Push on with the ‘great unwinding’, BIS tells central banks”

    • Alistair McLaughlin says:

      Except they’ve been ignoring the BIS’s admonishments about keeping rates too low for too long for a decade now. The BIS has been a voice in the wilderness for a decade now, pointing out the asset price distortions and the mis-pricing of risk that has resulted from reckless central bank policies.

      If BIS had any real authority, QE would have been unwound in 2011.

      • John says:

        BIS Board of Directors:

        How can you ignore such goodfella as William Dudley-President of NY FED ? Or Mark Carney-Governor of BoE ?

        Central bankers are extremely obedient,compliant and well-behaved people.It is the wild cowboys like high frequency traders and shadow mortgage lenders that cause financial mischief.

        BIS is like Commission (Bonnanno,Colombo,Gambino,Genovese,Lucchese families).They are powerful but,unlike God,not all-powerful.

      • Wolf Richter says:

        Totally agree. BIS economists even saw the financial crisis coming years ahead of time and warned about it and admonished regulators and central banks to do something about it. The economists at the BIS are totally ignored when what they say is inconvenient.

        • Setarcos says:

          Interesting. Never knew that about BIS, but do recall Mestro saying we had never had a serious widespread downturn in housing prices. Oops. Also recall himsaying he had expected the bigs to act in their own interest … as if they weren’t trying to do so! Sounded like the pillow talk with Andrea may have taken it’s toll.

        • Tim says:

          The writing was on the wall for the financial crisis when writing standards were trashed. Large volumes of NINJA loans said directly that the crisis was coming. Writing standards are at the crux of stability/instability, with a proviso about volume.

  3. raxadian says:

    With the almost negative rates some EU countries still have… a few people are gonna make a ton of money taking advantage out of this…

  4. Bobber says:

    I think the EU has to continue QE forever. Who else would buy government bonds from Italy, Spain, Greece, and Portugal. If QE ends in the EU, all these countries would go belly up or face severe austerity.

  5. Lenz says:


    From my experience with RE, 4-6% has been a moderate yearly return.
    If i could get 4% from a 2year CD. I doubt I’d even bother buying a future family home. That must be a scary thought for the FED. I wonder if they will cap the rate hikes to removed that safety from savers.

    What are the chances of a 90s Treasury returns in your view? Would 6% ever be in the future and if so, in what timeline in what conditions? Thanks.

    • JZ says:

      year N, you invest 100$ in 1 year CD at 4% yield. At year N+1, you get 104$.

      Year N, you spend 100$ but a house, rent is 4%. At year N+1, you have 4$ in rent and house is worth 104$ because rent rises from 4$ to 4.2$ due to inflation and house prices go up with rent rise.

      That’s the basic difference between house and CD.

      A better criteria is the thinking of breaking even cash flow. Buy a house if mortgage + tax + maintainace is lower than rent. Currently in CA, mortgage 4.5% + Tax 1.25 + 0.25 maintainace = 6%. I would NOT buy if rent/price< 6% Most houses are like rent/price < 3% currently.

      Another criteria is to buy based on fear and greed and ignore cash flow and asset comparasion.
      Fear that you will be priced out for ever if you do NOT buy now with what ever price.
      Greed that because there is always next sucker, I need to get in now regardless of math.

      Because math does NOT check out, I think there is a lot of fear and greed going on. Rate rise will redirect greed to math and fear of pricing out of fear of getting into deflating asset prices.

      I hope it works.

  6. Wolf Richter says:

    I would if the yield is high enough :-]

  7. KPL says:

    “The end of an era spreads.”

    I would disagree. I think this is all posturing and markets are discounting it and are therefore still near ATH

    Skittishness here…

    “Changes in trade policy could cause us to have to question the outlook,” Federal Reserve Chairman Jerome Powell said during a panel discussion at a European Central Bank conference in Sintra, Portugal. “For the first time, we’re hearing about decisions to postpone investment, postpone hiring.”

    Trial balloon to stop hiking/reducing balance sheet…even “gradually” at first sign of market being impacted.

    At the first sign of mild panic, we can expect all the CBs to open up the money spigot would be my guess and stabilise the market with no hike or cut in interest rate and no QT or active QE.

    Why the hell can they can not allow the market to clear by itself instead of acting as the saviours. Till we take away the keys of the house (ability to intervene with buying up anything and everything and cutting interest rates and throwing money to whoever they feel needs to be saved) they will keep doing the same thing.

    • Wolf Richter says:

      By “outlook” the Fed means its outlook on the economy, how much growth, how munch inflation, etc. Trade restrictions could push up inflation. Watch how nervous and hawkish the Fed will get when inflation hits 3% and is heading higher. That’s what it means. “Outlook” goes both ways.

      Despite what numerous free-trade pundits have been yelling about, tariffs will have little impact on production and consumption in the US economy since we have such a huge trade deficit. But they WILL push up inflation in the US.

    • Petunia says:

      I watched part of the conference too. The Bank of Japan had the most important statement I’ve heard in a decade. He conceded that zero and low interest rates didn’t work to improve the economy. He is getting the best result from raising wages. The Japanese economy is improving, GDP is growing, and so are interest rates. Who knew? Certainly not the fed.

  8. KEVIN says:

    Wolf, you are seriously misguided if you think the Bank of England is off the rate increasing path. Mark Carney has been fooling everyone for years warning interest rates will go up sooner than people think/faster than people expect for nearly ten years now.

    In fact he has been nicknamed “The Unreliable Boyfriend” since he has hoodwinked the markets so many times, and anyone who has knowledge of the UK economy knows that it is hopelessly unbalanced and dominated by the property sector.

    Basically the housing market IS the UK economy, with so many people flipping houses, buying houses to rent out(called “Buy To Let”),overborrowing in the belief that house prices only ever go up( and correctly assuming the BofE is trapped by its own ZIRP and QE policies to ensure prices never even correct never mind crash),and those trade is involved in building and maintaining or improving houses.

    To put the BofE track record on show, since March 2009, Carney dropped rates a quarter and then raised them a quarter, so no increase in NINE YEARS, the Fed since Dec 2008 has raised rates SEVEN TIMES.

    Carney will continue to prevaricate over raising rates, a bit like me promising to commence walking from London to Edinburgh, stating that I have taken the first step today, and next week I will seriously consider taking the next one, but not until I have analysed all the geographical and weather data!

    I don’t know how long sterling can survive in this environment, considering there is also all the uncertainty over BREXIT and with it the survival of the Conservative government(potentially letting in the most Marxist Labour government in history), Carney is at serious risk of triggering a run on the pound or even a total collapse.

    • Wolf Richter says:


      They said the same thing about Yellen and the Fed, and they said it even after the Fed turned “hawkish.” Until mid-2016, I called the Fed “flip-flop Fed.” But then something changed. The changes were minor and incremental but additive, and by the end of 2016, it was clear to me, this Fed had changed! And people pooh-poohed me and my articles at the time. And the Fed hasn’t missed a beat on its hawkish track since.

      Low interest rates and QE have a lot of negative consequences and cause a lot of distortions. These have become very visible now. And central bankers aren’t blind. They too see this stuff.

      • KEVIN says:

        However, if interest rates were to go up n the UK, given the phenomenal levels of mortgage debt, credit car debt and car finance, the whole economy would implode, wages are stagnant(falling in real terms-lower than twenty years ago) and inflation is grossly under estimated so there is zero ability to pay debt off at higher rates.

        Basically the UK economy has been taken hostage by the debt monkeys who have driven its levels of mortgage debt and personal debt(credit cards and auto loans) into the stratosphere, tying the hands of the Bank of England, who created the problem by keeping rates too low for too long.

        Contrast the US, with an economy that is getting seriously overheated, where employers in many sectors cannot find workers, despite increasing wages and interest rates need to go up very fast.

        • James Levy says:

          Your picture of the US economy does not remotely resemble anything I see and hear in rural Massachusetts. If you disaggregate the numbers you will see that the purchasing power of people who are not in the professional or managerial categories is stagnant or is going down. Underemployment is rampant and plenty of people like me have patchwork part-time jobs and although I am considered “employed” these gigs are not earning enough to support me, no less a family (my wife’s job as a teacher keeps the roof over our heads). British people are always prepared to believe any fairy story about how wonderful it is in the USA.

        • R2D2 says:

          You call Wolf misguided, and yet you buy the media fairy tale about US economy heating up as if you are here and experiencing it. If US economy was heating up, then wages would have had to increase.

        • Steve clayton says:

          Hi Kevin, definitely think there’s a North-south divide in the UK ref rising personal debt. If the proverbial hits the fan it’s going to be South of Watford. IE London which suffers.

  9. KEVIN says:

    Wolf, if you would like to get a handle on sentiment towards Carney and his circus as I call it, check out Notayesmaneconomics blog, link below.

    Shaun Richards, the author, economist, ex futures and options floor trader, has a daily blog writing on the limitations, distortions and downright manipulation of economic statistics by the Bank of England and HM treasury, and often writes scithing pieces on the appalling forecasting record of the bank and what has now after almost ten years of distraction, false promises and threats of higher interest rates has descended into farce, where literally noone believes a word that comes out of Carney’s mouth anymore.

    Adding to the total loss of credibility from sending mixed signals to the markets regarding interest rates, is it’s appalling record on economic forecasting, which post BREXIT predicted a sharp recession(leading to the famous panic quater point cut in rates which put further pressure on a collapsing £), the result was the economy improved by nearly all measures!

    • Wolf Richter says:

      KEVIN, if you would like to get a handle on what the BoE will do, look at the Fed, and my articles about it :-]

      • dan rogers says:

        KEVIN, agree about the over indebtedness of the UK, HOWEVER…. the only way those debts are getting cleared is a) writing them off people’s QE style (unlikely) or b) wage inflation (more likely).

        IMO even the BOE/ECB/FED/BIS have realised that QE only makes the problem worse (QE -> more debt, not less) and therefore either they fix it asap or the whole of the Europe is going to be set on fire in a populist revolution.

  10. Alistair McLaughlin says:

    Before it starts shedding assets on its balance sheet, however, the BoE wants to raise the Bank Rate enough to where it can cut it “materially” if needed…

    Sad that the only reason central bankers can think of for raising rates is so they can cut them again at the first hint of a downturn.

    • Tom Kauser says:

      I think they should shear the sheep while they rest and let them continue to jump on the bed while active!

    • Kent says:

      IMHO, the only thing central banks care about is wages. If it appears wages are headed up, they raise rates to slow the economy and kick off a recession in order to throw people out of work and reduce wage inflation. It’s a fine balancing act to keep both unemployment and wage growth low.

  11. DK says:

    The 10 and 30 year are getting very close. Indication of the markets disagreement with the Fed?

    • Tom Kauser says:

      The fed control both ends of the yield curve and negative yields are an oxymoron!

    • Wolf Richter says:

      Yes, the markets have been disagreeing with the Fed for 2.5 years. Part of the market is in total denial. These folks are “fighting the Fed.” That’s a great way to get burned.

      • KPL says:


        Do you really think that ECB and BOJ can ever raise rates?
        Is that the reason markets are not biting?
        Will the CBs not blink and do QE (and stop rate hikes) if the market sneezes? After all, past has shown that if market sneezes the CBs get a cold. Fever too after 2008.

        • Wolf Richter says:


          The ECB will raise rates. These negative rates cause huge problems and are destroying the pension system in many countries. So rates will go up in the Eurozone.

          Japan is a special case. They have entered into a social contract that they would rather have a currency crisis than a debt crisis. Japan’s debt is too large to allow the markets to control it. So the JGB market is now under the iron-fisted control of the BOJ. That will never change. Japan was never really a “free-market” financial system and no Japanese government ever really believed in it.

          So I think Japan will gingerly move forward, trying to avoid a currency crisis for as long as it can. Unlike the US, they have a lot of powerful tools to do that, including an export-oriented economy with a big trade surplus, a large pile of foreign exchange reserves, a declining working-age population (lower demand for imported goods); and rising automation to make up for the declining working population.

          So my bet is that Japan might raise rates a little to get them out of the negative, but not much more.

        • JZ says:

          My opinion is simpler. The central bank of a country has to follow what FED does, NOT what it will do to its own country’s economy.
          Like all investors, do NOT fight the FED!
          It is simply because US is the largest economy and if your moneytary policy does NOT follow the FED, the amount of “money” flows into and out of your country can become a nightmare.
          So yes, the BOE, the BOJ will have to follow.
          China and ECB may have a shot fighting the FED given its economic size the capability to absorb flows of international money.

  12. Tom Nugent says:

    EVERY TIME, several times a day, that I read one of your Wolfstreet posts, the page includes an ad and a link to Jim Rickards predicting the end of the dollar and the conspiracy by “the global elite” to replace it with Distributed Ledgers, as soon as July 1st 2018. Is that ad a reflection of your thinking, a placement by your internet host, or something else?

  13. Tom Kauser says:

    The Fed is out of control shrinking the money supply while the White House (using new guidelines inserted in 911 survivors bill giving President final authority over trade) is harming demand ? A bout of inflation from producers trying to ” just make something” from future sales forecast and bang 7 million jobs gone Lather Rinse Repeat? This is number 5 for me in 57 years!

  14. Tom Kauser says:

    Treasury bonds are the new GOLD!

    • James Levy says:

      Don’t tell that to the people screaming that the Social Security Trust fund is about to go bankrupt because all it possesses is “a bunch of IOUs”, i.e. Treasury Bonds. I always want to ask one of these Cassandras if they had a hundred billion dollars in Treasuries in their bank account, would they consider themselves broke?

  15. Tom Kauser says:

    I love long corporate credit the mostest.

  16. Ambrose Bierce says:

    The Brits and the US have always been joined at the hip. They are not on the EURO, so what they do does not portend what happens in Europe. The current financial conditions remain loose : despite a tight money policy in the US, the EU will probably have to keep QE going to avoid a global credit contraction, just objectively the US (and BOE) policies are reckless and self interested attempts at saving their own skins, in a global recession and in the case of our Fed to avoid the wrath of the Tweeter in chief. The days of CBs on speed dial is over, and the Feds non-tightening tightening policy will only force the EU to delay a wind down of their policies.

    • Bobber says:

      Thanks for the link. The spikes in the graphs indicate the models have little predictive ability. Financial stress forms very quickly and cannot be reliably predicted beforehand.

    • Tim says:

      Capitalism still has bouts of creative destruction unleashed on the unwary. A possible next crisis could be in those high yield junk bond issuing companies, that have had such a large increase in issuance over recent years, with all the looseness. To me it looks like the poor writing standards story. As long as high yield junk sectors blow off the fed, the latent problem grows, with more junk issuance. One day the Fed will raise enough that junk will get the message, and once again, creative destruction will be unleashed. Combine that with a sufficient drop in oil, and crisis will arrive. Will it happen? Dunno. The Fed looks serious to me.

      • Ambrose Bierce says:

        My own feeling is that Britain can weather a global financial meltdown, because they are a lot closer to socialism than anyone in the EU. These meltdowns in PFI really mean they are getting their house in order ahead of the storm. The viability of corporate debt depends on their ability to sell overseas, a door which is slamming shut. I assume the Fed is reluctant to defend the stock market because of all the ‘funny’ money, SNB and otherwise, and when 46 wonders where will the money come from to keep USG going, he (or she) should walk down to Wall St hat in hand, and big stick behind the back. In a more civilized nation our Fed chief could blow out those capitalist cronies and their corporate positions (stocks and bonds) and force that money to buy UST.(without offering them an obscene return in yield) For the good of the nation.

  17. Rates says:

    This is not the big story. The fact of the matter is the BoE is prepared to do whatever it takes:

    “The Bank of England will be allowed to provide more than £500bn in lending to the economy without seeking the Treasury’s permission, in a move that reinforces the strength of the UK financial system as Britain prepares to leave the EU.”

    Without Brexit, this article would make sense, but the BoE as a whole does not seem to have that confidence.

    • Wolf Richter says:


      You’re misquoting the article — didn’t read the whole article? This stuff drives me nuts.

      The author goes on to pooh-poo the paragraph you cited. That paragraph was quoted from the Guardian, and the author says this about that paragraph:

      “The Guardian, and many others, comment on the story in a way that is not apparently related to the documentation published, saying:

      “The Bank of England will be allowed to provide more than £500bn in lending to the economy without seeking the Treasury’s permission, in a move that reinforces the strength of the UK financial system as Britain prepares to leave the EU.”

      “I have scanned all three documents published by the government and Philip Hammond’s speech, and the source for this story is not apparent, so it must have come from an independent briefing. The new arrangements that the documents refer to are also less than transparent in some respects, and so anything I say here is, I stress, provisional. Some initial thoughts do, however, emerge.”

      And then he pooh-poos the whole thing further in detail.

    • Wolf Richter says:

      BTW, the Fed also acted as lender-of-last resort when the credit market froze up during the financial crisis. It published an alphabet soup of programs under which it did this. The Fed lent to big industrial companies with finance branches such as GE. Those were loans that had to be paid back and that were paid back.

      These programs were totally different than QE.

      The BOE might not be allowed to do this. And it might be preparing for a potential crisis during the Brexit period where credit freezes up, getting the mechanisms in place to act as lender-of-last resort to corporate entities.

    • Rates says:

      Ah my bad then. Although the fact that it’s been raised probably means that it’s been considered. They are probably fishing for a public opinion.

      Do you seriously think the BoE will not engage the nuclear option when things go REALLY south? No way they will be selling the bonds they have to a crashing market. Heck they might do the BoJ trick and buy every single bond out there.

      • Wolf Richter says:

        You’re absolutely correct: every central bank will consider and/or use the “nuclear option when things go REALLY south.”

        From what I can tell, there’s no appetite to restart QE at the Fed during the next recession, but if the Big S REALLY hits the fan, and credit freezes up again, no telling what they will do. That genie is out of the bottle.

        But a run of the mill recession doesn’t require the nuclear option. We’ve had many of them, and after a few quarters they’re over.

  18. Lenz says:

    Thought it was worth noting how the media is trailing your articles by a few months. When I first starting reading your articles, there was a six month lag between your opinion and what bloom/wsj would inevitably publish. Seems we’re getting only a few months disparity now.

    I wish you were more mainstream, you deserve it.
    Thanks for up-keeping this website. Always educational.

    June 22, 2018 – the struggle for deposits intensifies.

    • Wolf Richter says:

      Thanks, Lenz. Yes, I would love for this site to have 2 million “visitors” a month. But I’m pretty happy that it has 200,000 “visitors” a month and growing :-)

Comments are closed.