Another £375bn in quantitative easing (QE) could be pumped into the UK economy over the next three years if Mervyn King’s outlook is correct, M&G fund manager Richard Woolnough points out.
At the end of June, Bank of England governor King told the Treasury Select Committee that the crisis is far from over. “All the way through, I’ve said to this committee that I don’t think we are yet half-way through – I’ve always said that and I’m still saying it,” he told MPs.
Woolnough notes the implications this outlook has for gilt yields and the UK economy.
“If we are not yet half-way through this crisis, then this implies that [interest] rates will stay at these levels for at least another three years to 2015, and a further round of £375bn of QE is potentially on the agenda,” he says.
“If this interpretation of the outlook turns out to be correct then these very low levels of short and long term gilt yields begin to look more logical to gilt investors.”
Woolnough adds that the ultra low yields being seen in US treasuries and German bunds also make sense if it is assumed the UK will not recover until the economy outlook in the US and Europe starts to improve.
Last week, the Bank of England boosted its asset purchase programme by another £50bn, taking the total amount committed to QE up to £375bn, after citing a weaker outlook for UK output growth.
The base rate was also held at its historic low of 0.5 per cent, where it has sat since March 2009.