Eight years on: How things have changed since the onset of QE
In the wake of the global financial crisis which unravelled in 2008, the Bank of England stepped in and on March 5 2009 cut interest rates to an ‘emergency level’ of 0.5% and introduced a programme of one bond buying, which everyone now knows as QE.
Back then few would have predicted that rates would have stayed the same until last year, even fewer would have made the bet the next move would be down following the surprise decision to quit the European Union in June.
So how effective has been post-2008 monetary policy? Hargreaves Lansdown’s senior analyst Laith Khalaf, says that by accident or design, March 5 this year is also the deadline for written submissions to the Treasury Select Committee enquiry into the effectiveness and impact of emergency monetary policy.
To remind people what life was like back in March 2009, a two-year fixed mortgage would have set you back 5.97%, 10 year UK gilts yielded 3.6%, the FTSE 100 stood at 3,530 and the average instant access account interest rate was 0.94%.
Flash forward eight years a two year fixed mortgage is 2.5%, 10 year UK gilts yield just 1.2%, the FTSE 100 stands at 7,383 and the average instant access account interest rate is 0.37%.
“Loose monetary policy has annihilated the income streams of cash savers and has also pushed bond yields down to historically low levels, with unintended consequences, because the price of government debt is used as a key yardstick in many markets,” says Khalaf.
However he says it would be unfair to characterise QE as an entirely “pernicious force”. While remaining sluggish, he notes the UK economy is at least still heading in the right direction, while borrowers have benefited form low interest rates.
“This in turn has helped to support the housing market and hence the wealth of homeowners across the country,” he says.
At the same time the UK stockmarket has enjoyed an eight year bull run, with the FTSE All-Share index up 192.3% since March 5, 2009.
“Not all the rise can be attributed to loose monetary policy, but QE has injected liquidity into the market, kept the wheels of the economy turning, and made the dividends offered by equities look attractive when compared to bond and cash yield,” says Khalaf.
So how have other asset classes fared over the same time period? The next best investment behind the FTSE All-Share would have been in corporate bonds, which returned 108.9%. Some way behind comes gold (56.1%), while holding UK gilts would have returned 18.4%. Holding cash proved the worst thing to do, with it returning just 5.4% over the last eight years.
“Looking forward QE does have to be unwound at some stage,” says Khalaf. “However this isn’t going to happen in one big bang, it’s going to be a slow and gradual process.
“In the meantime we can expect interest rates to remain low for the foreseeable future, and while in the short term the stockmarket can of course head in either direction, history tells us it’s still the best place for long term money.”