In a speech to the London Society of Chartered Accountants yesterday, Bank of England deputy governor Charlie Bean said the downturn has “troughed”
He said: “Early in the year, there were considerable fears that the recession would continue to deepen, but some of the worst downside risks look unlikely to crystallise.”
Bean said a drop in gilt yields, a biggest rise in equity prices over six months in three hundred years, the issuance of £60bn of corporate bonds and Libor’s return to base rate levels suggest that the economy is improving, in part thanks to the Bank’s quantitative easing scheme.
He said: “Gilt yields can move for a variety of reasons, but we find that this spread has fallen by around 0.75 per cent. Moreover, no such movement is observed in either the United States or euro area, which strongly suggests that the movement may be related to our gilt purchases.”
The Bank has so far added £164bn into the economy through its Asset Purchase Facility, and plans to add another £11bn before the end of the month. Bean said as yet there is no definitive evidence to suggest the asset purchase has worked and said there may not be for many years to come.
He defended the current successes of the scheme, but admitted that the £175bn has yet to drip down into the real economy. He said: “Obviously we would prefer that the money circulates more rapidly. Since the banks collectively are now awash with reserves, they should not be prevented from making additional loans because of any liquidity concerns. Banks are, though, constrained by a lack of capital and are looking to reduce leverage rather than increase it.”
But Bean argued that analysis of the Bank’s central reserves is not a good indicator of how well the newly created money is circulating.
He said: “When the Asset Purchase Facility buys a gilt from a pension fund, it can be thought of as paying with a cheque drawn on the Bank of England. The pension fund will then bank the cheque with its own commercial bank, so the latter now has a claim on the Bank of England – that is what reserves are.
“So the level of commercial banks’ reserves in aggregate is determined by the way we have funded the asset purchases, not by the commercial banks’ own decisions. The size of banks’ reserves cannot, as is frequently claimed, be a sign that they are “sitting on them”. No matter how rapidly or how slowly the economy is growing, or how fast or slow the money is circulating, the aggregate amount of reserves will be exactly the same.”