Central banks are embarking on the largest quarterly purchase of assets since quantitative easing was introduced following the financial crisis, as policymakers double down on monetary policy despite growing concern it has reached its limits.
In the final three months of the year, the UK, Japan and Europe are expected to spend a combined $506bn on assets — the largest quarterly sum created since the early days of the US Federal Reserve’s QE programme in 2009.
Figures from JPMorgan Asset Management show that rolling quarterly asset purchases have intensified after the UK’s vote leave the EU as the Bank of England joins the European Central Bank and Bank of Japan in cutting interest rates and creating money to buy assets — mostly government bonds — in a bid to expand credit and spur investment.
Central bank governors including the BoE’s Mark Carney and ECB’s Mario Draghi insist QE has aided economic stability and prevented catastrophe, but the success of the scheme is contested by those who say inflation remains limp and that asset purchases have fuelled inequality, encouraged profligacy and hit the incomes of those who rely on savings.
“It is now nearly a decade since the financial crisis. In this time central banks have amassed huge balance sheets through quantitative easing and there is as yet no end in sight,” said Steven Major, global head of fixed income research at HSBC, who expects global bond yields to be no higher in 2021 than they are now.
“All the evidence suggests a long drawn-out process of deleverage. We should be thinking in terms of decades, not single years.”
While the US concluded its QE operations in 2014, the BoJ, BoE and ECB are still expanding, pushing the collective balance sheets of G4 central banks to more than $13tn.
Citi estimates that the collective balance sheets of central banks is now equal to about 40 per cent of global GDP, a move that is shrinking the universe of securities available for investment, according to credit strategist Hans Lorenzen.
While the policy has pushed bond prices up — and sent yields to record lows — stock markets in Japan and the eurozone have not experienced the same turbocharged boost that equities in the US did.
“The effectiveness of QE is waning,” said Mr Lorenzen. “Both in terms of the economy and the markets.”
As a result, calls are growing for governments to add fiscal stimulus to the mix.
In June, the Bank for International Settlements warned that the world faced a “risky trinity” of high debt, low productivity growth and dwindling firepower at the world’s big central banks. “It is essential to relieve monetary policy, which has been overburdened for far too long,” said Claudio Borio, head of the BIS monetary and economic department.
Alberto Gallo, head of Algebris Macro Credit Fund, says markets have learnt to anticipate central bank action — meaning increasingly greater firepower is required for the same results.
“One of the major criticisms is that what was supposed to be a once in a lifetime emergency programme has been repeated and expanded,” he said. “This is why investors cannot stop talking about QE infinity.”