Photographer: Simon Dawson/Bloomberg

There's Room for More Bond-Buying at the Bank of England

Deputy Governor points out room for expansion relative to other central banks
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The Bank of England may already own about a quarter of the U.K. government bond market, but that hasn't stopped one of its most senior officials saying it could gobble up more.

The small size of the balance sheet relative to other major central banks gives plenty of scope for expansion if needed, according to Deputy Governor Minouche Shafik.

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“Relative to the ECB and BOJ we still have a relatively smaller share of gilts as a percentage of GDP, and other central banks have gone further,” she told Bloomberg Editor-in-Chief John Micklethwait in a question-and-answer session at the Markets Most Influential Summit in London. “We have further room to do more if we needed to.”

That's not a view shared by some economists, who point to gilt yields already at record lows and the risk of distorting the market.

“I'm not sure I'd put too much weight on the absolute size of the balance sheet, I'd be more worried about the limits of the effect of monetary policy -- in that there's only so far you can push the yield curve down,” said Chris Hare, an economist at Investec in London. “Also, there are other constraints to monetary policy in terms of side effects and asset bubbles.”

Shafik also acknowledged those risks, and said policy makers had taken them into account when designing the stimulus plan.

“In making our policy decisions we must bear in mind we are uncertain about the magnitude of both the impact of QE on the economy and its side effects,” she said in the speech. “Conscious of the structural changes in market liquidity over recent years, we are also purchasing at a slow pace compared to previous rounds of quantitative easing to minimize any impact on market liquidity.”

This chart shows how the central bank is buying at a slower pace than in the past:

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Even so, three of the nine-member Monetary Policy Committee opposed the additional purchases in August, saying they weren't yet warranted. That could mean more bond-buying is probably a distant prospect for now. 

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