The Bank asked to buy £2bn in Government bonds, or gilts, from any investors. The comeback was better than it hoped for – it was offered £10.5bn of bonds – but the speculation is that much of this is overseas money and UK pensions funds, its primary target audience, appear very wary.
The ultimate plan is for UK investors to swap their gilts for paper, invest that paper into the banks and the banks will then lend out that money in the form of residential and commercial mortgages. But it looks like pension funds, which hold a fifth of all gilts, don’t really want to let them go.
Speaking at this week’s National Association of Pension Funds conference, Railways Pension Fund chief executive Chris Hitchen said: “Pension funds hold long bonds to match liabilities and may not wish to exchange them for more risky corporate paper.”
Hitchen argued that gilt yields may fall further, so would make pension funds hold onto their gilts even more.
Does this mean quantitative easing will not work?
The Mortgage Practitioner principle Danny Lovey says quantitative easing will not lead to more mortgages.
He says: “The Bank is not thinking with its head on. Gilts are just a flight to safety, as soon as the equity markets pick up investors will not want gilts, especially when yields are dropping to less than 3 per cent.
“The Government should be concerned with the fact that when the markets do pick up they will not be able to get this debt away. This isn’t going to solve anything.”
Hitchen said the Bank was “very, very anxious” to get the £75bn into the public in the form of mortgages. But if the pension funds don’t want to sell, the money could well trickle out of the UK as international investors, rather than domestic funds sell their gilts. As we are well aware, international investors are the last people who will be lending mortgages in the UK.
If the Bank cannot turn quantitative easing into mortgages, it hasn’t got many more tricks up its sleeve.