The big moves in asset prices during 2009 – a 50% rise in equities, 150bp fall in LIBOR spreads, the 150 bps fall in targeted corporate bond spreads for example – will have been strongly supported by the Bank’s monetary policy operations. And by purchasing the gilts which asset managers and others would normally have bought, the impact of the quantitative easing programme will have been to increase the demand for more risky assets – like corporate bonds. So the corporate and gilt purchase programmes have been complementary. Conclusion In my talk this evening, I hope I have explained a bit more clearly the motivation for and the design of the APF corporate purchase schemes. The Bank has not sought to provide large scale funding directly using public money. Rather, the operations have been consistent with a central bank acting as “Market Maker of Last Resort”. The Bank has transacted in modest quantities designed to improve the liquidity of corporate credit markets, bring down the cost of credit and encourage private sector lending. That has been supported by the much larger programme of quantitative easing and the low level of Bank Rate. The evidence suggests that, in conjunction with a very large monetary stimulus, abroad as well as at home, the corporate purchases have been successful in helping to invigorate those corporate credit markets in which the Bank has intervened. References Benford J, Berry S, Nikolov K, and Young, C (2009), “Quantitative Easing”, Bank of England Quarterly Bulletin 2009 Q2, available at http://www.bankofengland.co.uk/publications/quarterlybulletin/qb090201.pdf.
Eligible firms also had to contribute materially to the UK economy and must not be banks (other policies, as noted, had been introduced to help banks). And individual counterparty limits were imposed. Although disentangling the precise impact of the scheme from the global improvement in financial markets is difficult, it does appears to have been successful. Purchases peaked at around £ in late April 2009, at that time amounting to around one third of the sterling CP market. But, as I have stressed, the objective of the scheme was not to purchase a large quantity for its own sake. It was much more important that market spreads for the average issuer started to fall soon after the scheme was launched. Market spreads for all A1 rated sterling paper fell below APF spreads in August 2009 (Chart 3). By February 2010 nearly all firms who had sold CP to the APF were able to re-issue at cheaper rates in the market and the Bank’s CP holdings have fallen back to under £ That decline in usage, together with greater ability to issue in the market, indicates the improvement in market conditions which the scheme was intended to help bring about. I should note that, at the current moment, the need for firms to issue CP is at something of a low point. Investment-grade firms do not seem to have a strong demand for short-term cash and are concentrating on issuing longer-term debt.