Bank of England Quarterly Bulletin September 2011

and no, it’s not the bank – it’s me being shamefully neglectful of my “fetch” list

Summary of Quarterly Bulletin 2011 Q3 (Volume 51 Number 3)

Recent economic and financial developments
Markets and operations (page 184)
This article reviews developments in sterling financial markets, including the Bank’s official operations, between the 2011 Q2 Quarterly Bulletin and 26 August 2011. The article also summarises market intelligence on selected topical issues relating to market functioning.

Research and analysis
Research work published by the Bank is intended to contribute to debate, and does not necessarily reflect the views of the Bank or of MPC members.

• The United Kingdom’s quantitative easing policy: design, operation and impact (page 200)
  By Michael Joyce, Matthew Tong and Robert Woods of the Bank’s Macro Financial Analysis Division.
  In response to the intensification of the financial crisis in Autumn 2008, the Bank of England, in common with other central banks, loosened monetary policy using both conventional and unconventional policy measures. In the United Kingdom, the principal element of these unconventional measures was the policy of asset purchases financed by central bank money, so-called quantitative easing (QE). Over the period March 2009 to January 2010, £200 billion of assets were purchased, overwhelmingly made up of government securities, representing around 14% of annual GDP. This article reviews the motivation for these central bank asset purchases and describes how they were implemented. It goes on to review a range of evidence for the impact of the asset purchases made to date, both on financial markets and more widely on the economy. While there is considerable uncertainty about the magnitudes, the evidence suggests that QE asset purchases have had economically significant effects.
  
• Bank resolution and safeguarding the creditors left behind (page 213)
  By Geoffrey Davies and Marc Dobler of the Bank’s Special Resolution Unit.
  Not for the first time, the global banking crisis illustrated the vulnerability of banks to a loss of confidence by their depositors, other creditors and counterparties. The experience highlighted the need to have special arrangements for dealing with failing banks — a ‘special resolution regime’ — that provides the authorities with the tools necessary to reduce the systemic risks arising from a bank’s failure while at the same time limiting the taxpayers’ exposure to the costs. The United Kingdom’s own Special Resolution Regime for dealing with failing banks and building societies was born out of the difficulties in dealing with the failure of Northern Rock in the autumn of 2007.
  
• Developments in the global securities lending market (page 224)
  By Matthew Dive of the Bank’s Payments and Infrastructure Division, Ronan Hodge and Catrin Jones of the Bank’s Financial Institutions Division and James Purchase of the Bank’s Sterling Markets Division.
  Securities lending plays an important role in supporting financial markets. For example, it can improve market liquidity, potentially reducing the cost of trading and increasing market efficiency. But by increasing the interconnections between institutions it can pose potential risks to financial stability, which are exacerbated by a lack of transparency in the securities lending market. Since the onset of the financial crisis, market participants have attempted to address some of these risks, and fundamental changes to market infrastructure are being discussed, such as the use of central counterparties. New regulations under way to improve the resilience of the financial system may also impact both the risks to financial stability from securities lending and its benefits.
  
• Measuring financial sector output and its contribution to UK GDP (page 234)
  By Stephen Burgess of the Bank’s Conjunctural Assessment and Projections Division.
  In the decade before the financial crisis, the UK financial services sector grew more than twice as fast as the UK economy as a whole. But there are many conceptual difficulties associated with measuring output in finance. This article describes the contribution of the financial sector to GDP and assesses the uncertainty around recent estimates. There is some evidence that financial services output grew less quickly over the recent past than the official data suggest, although this probably had only a small impact on the rate of growth of overall GDP.
  
• The Money Market Liaison Group Sterling Money Market Survey (page 247)
• By Ben Westwood of the Bank’s Sterling Markets Division.
  The Bank of England recently initiated a new survey of the sterling money market on behalf of the Money Market Liaison Group. This market — where short-term wholesale borrowing and lending in sterling takes place — plays a central role in the Bank’s pursuit of its monetary and financial stability objectives. Participants include banks, other financial institutions and non-financial companies, who use the market to manage their liquidity, by investing over short periods and raising short-term funding. The survey supplements the Bank’s long-standing gathering of market intelligence and will increase public understanding of the market. Over time, it is expected to help identify emerging structural trends in the market, helping policymakers assess the impact of their actions on the behaviour of market participants. This article introduces and presents the results of the inaugural survey launched in May 2011.

Summaries of Working Papers

• An estimated DSGE model of energy, costs and inflation in the United Kingdom
• The impact of permanent energy price shocks on the UK economy
• Evolving UK and US macroeconomic dynamics through the lens of a model of deterministic structural change
• Preferred-habitat investors and the US term structure of real rates

Report
Monetary Policy Roundtable (page 258)
On 24 June, the Bank of England and the Centre for Economic Policy Research hosted the sixth Monetary Policy Roundtable. These events are intended to provide a forum for economists to discuss key issues affecting the design and operation of monetary policy in the United Kingdom. As always, participants included a range of economists from private sector financial institutions, academia and public sector bodies. At this sixth Roundtable there were two discussion topics: will the protracted period of above-target inflation lead to further upward pressure on prices?; and how will the contrasting fortunes of the household and corporate sectors play out?

Speeches

Full document (PDF 98pp)

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