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QE – fuelling the downturn

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Patrick Kelliher

The announcement of a further £60bn of Quantitative Easing (QE) by the Bank of England (BoE) on Thursday 4th August [1] has been welcomed as A Good Thing, but is it ?

The markets certainly thought so. The FTSE100 has risen by 3.5% since [2]. Bond prices have risen on the back of QE together with £10bn of Corporate Bond purchases also announced.

However the corollary of higher bond prices is lower bond yields. 20-year Gilt yields have fallen by nearly 40bps from 1.65% p.a. on the 3rd August to 1.27% on the 10th August. Index-linked Gilt yields have fallen similarly – the 20-year index-linked Gilt yield has fallen from -1.40% p.a. to -1.70% p.a.[3].

These falls in yields have pushed up the value of defined benefit pension scheme liabilities more than the rise in scheme assets. Hymans Robertson, a leading pensions consultancy, has estimated that the fall in yields has increased pension scheme liabilities by £70bn to £2.4 trillion (compared...

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