It’s not very festive, but we have to wander into acronym territory again.
Moody’s last night warned that the UK’s AAA credit rating is at risk if economic
growth continues to slow. At the same time, minutes from the Bank of England’s meeting early this
month, released today, show that its committee members were unanimous in backing Quantitative Easing, and several of them feel more QE can be justified. But how potent can QE be if Britain loses
its AAA?
It’s clear that George Osborne, who’s claimed that the UK has retained its top debt rating so far due to his deficit-cutting and austerity measures, won’t have a happy new year if Britain loses its AAA. But it’s going to be a big headache for Mervyn King too.
The BOE’s monetary stimulus programme, as we pointed out recently, is not very efficient and getting less efficient by the day. Quantitative easing — which has totalled over £200 billion so far — is based on the premise that the Bank’s buying of gilts will push down bond yields, keeping interest rates low and thus stoking business lending that may generate economic activity. A credit rating downgrade would push bond yields up, undermining everything the Bank’s been trying to do.
Of course, if Britain loses its AAA while nations all about are losing theirs too, we may be back to square one in the end. And when the US lost its AAA standing in August, the yields on its Treasury bonds fell back eventually, because in times of economic turmoil and fear, people prefer to put their money in fixed income. Still, it’s hard to avoid the impression that QE is like a very, very large cat chasing its own tail. It’s highly uncertain it’s going to get us anywhere.
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