InvestmentsMar 27 2020

How does QE help the coronavirus problem?

  • Describe the significance of QE
  • Explain the Bank of England's actions towards corporate bonds
  • Describe stagflation
  • Describe the significance of QE
  • Explain the Bank of England's actions towards corporate bonds
  • Describe stagflation
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How does QE help the coronavirus problem?

Additional cash in the system is likely, directly or indirectly, to find its way into the banking system. Banks can then use this cash to lend more into the real economy, or shore up their books if they are suffering heavy losses as a result of businesses going bust. 

Some of the extra £200bn being put into the market by the Bank of England is being spent on buying corporate bonds, that is, the debt of private companies. 

The aim is to ensure that those private companies can continue to finance their operations by borrowing from the markets.

If the central bank did not buy corporate bonds then the yields would rise sharply, and companies would find it less affordable to source credit, which would restrict their capacity to stay in business, and employ people. 

In its statement announcing the quantitative easing plan, the Bank of England stated it is in response to “an economic shock that could be sharp and large but should be temporary.”

Impact of QE in the economy

David Jane, who jointly runs a range of four multi-asset funds at Premier Miton Investors, is generally more sceptical of the potential positive impact of QE on the real economy.

He says the effectiveness or otherwise of the government’s own spending plans will determine the overall impact.

Mr Jane says: “It doesn’t matter how much interest rates and QE they do - unless the market can really get an understanding of the profit impact from the virus, and which companies will survive, it's difficult to see equities really motoring.

"Individual stocks may find levels and rally but the index as a whole require more certainty.  

"QE is ineffective now as markets are deleveraging as the external shock is too great.

"The market has been unconvinced by recent QE-type measures, simply because they cannot change the reality of the economic disruption we are dealing with. 

"When the financial crisis and then the eurozone crisis hit, these were financial issues and could be solved by financial means.

"The current situation is in the real economy, and while ample liquidity is a necessary condition for stabilisation it is insufficient on its own.”

He added that he did not think QE will lead to a fall in the value of the dollar, as the dollar is a safe haven asset class at times of market strife. 

Mr Kamal agreed: "Strength in the US dollar during times of global stress is a well-known phenomenon.

"QE from the Fed won’t reverse that, especially as monetary loosening is being conducted en masse by all major central banks.

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