The Big Taper starts one central bank at a time. But you gotta keep the markets from swooning with a bit of welcome delusion.
By Wolf Richter for WOLF STREET.
The Bank of England’s Monetary Policy Committee (MPC) today announced that it voted unanimously to maintain its policy rate at 0.1%. But in terms of its asset purchases, it took the trail the Bank of Canada blazed last November and then widened in April: tapering.
The BoE announced that the blistering pace of its asset purchases would be “slowed somewhat” – tapering the bond purchases from £4.4 billion a week to £3.4 billion a week – but that this tapering was an “operational decision” that “should not be interpreted as a change in the stance of monetary policy.”
This “is not a tapering decision,” emphasized BoE governor Andrew Bailey during the press conference. The reason this tapering is not “a tapering decision,” he said, is because the BoE left its target for the final level of QE assets unchanged.
Unlike the Fed, the BoE doesn’t have an open-ended QE, but had set a target of bringing its holdings of UK government bonds to £875 billion and its holdings of corporate bonds to £20 billion, for a combined target of £895 billion. And at the meeting, the BoE didn’t change these “fixed amounts,” as Bailey put it.
Obviously, denying that tapering is tapering was designed to mollify the markets with a welcome dose of delusion, and it worked: the UK’s stock index FTSE 100 rose 0.5% for the day.
However, when the members voted on maintaining the target of £895 billion, it wasn’t unanimous, with eight members voting for maintaining it, and one member, outgoing chief economist Andy Haldane, voting to lower it by £50 billion, to £845 billion.
The Bank of England has other assets on its balance sheet, in addition to the QE-related government bonds and corporate bonds.
Following the Brexit vote in 2016, the BoE’s total sterling-denominated assets surged as it was using QE to pump up asset prices. This ended in 2018. But then the Pandemic hit, and the BoE’s assets skyrocketed:
The Bank of Canada also denied initially it was “tapering.”
The Bank of Canada, which now has a super-mega housing bubble on its hands, blazed the trail last October when it announced that it would taper its purchases of Government of Canada bonds from C$5 billion a week to C$4 billion a week, and that it would stop buying MBS altogether. This wasn’t tapering, it said; it was just “recalibrating the QE program to shift purchases towards longer-term bonds…” and yada-yada-yada.
Then in April, it announced that it was in fact tapering, and that it would further taper its government bond purchases from C$4 billion a week to C$3 billion a week.
This came after it had announced in March, citing “moral hazard” as reason, that it would unwind its crisis liquidity facilities, and that this would reduce its total assets by about 17%, from C$575 billion at the time, to C$475 billion by the end of April. And this has now transpired on its balance sheet as of the week ended April 28:
Other central banks too...
The central bank of Norway, Norges Bank – which never got into QE in the first place, and therefore cannot taper – confirmed today that it would raise interest rates in the second half of 2021.
Sweden’s central bank, the Riksbank, announced in late April that it is following through on its plan and completely end its QE program later in 2021.
The central banks of Brazil, Turkey, and Russia, whose economies are grappling with surging inflation, already announced shock-and-awe rate hikes.
Now lagging behind are the biggies, the Fed, the ECB, and the Bank of Japan. And taper talk is all over the place.
In the US, a veritable cacophony of tapering talk has erupted in public with multiple daily speeches by Fed governors, spearheaded by Dallas Fed President Robert Kaplan, who today said he wants the Fed to start talking about tapering “sooner rather than later.”
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