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Much of the £2 billion of new money created by the Bank of England yesterday may already have flowed abroad, a top financial expert has warned.
Danny Gabay, who used to work at the Bank, said that biggest players in yesterday's first round of the £75 billion quantitative easing were almost certainly foreign investors.
The Bank of England bought £2 billion worth of Government bonds known as gilts in its market operation yesterday.
But it could have bought in five times that amount based on the willingness of investors to sell.
Quantitative easing is Bank of England Governor Melvyn King's latest attempt to free up the banking industry's frozen credit markets.
While the Bank is not literally printing new banknotes, its aim is to inject extra cash into the financial system by buying in gilts from banks and institutions.
It hopes that they in turn will then start to lend on the cash to homebuyers, consumers and small businesses.
Mr Gabay, who now works for Fathom Consulting, said: "The feedback from the auction is that pension funds and hedge funds did not sell. The only other major holders of gilts are foreign or overseas investors."
He added: "Putting two and two together, they must have been doing the selling. That means the quantitative easing is going to do us less good."
Official statistics show that overseas investors own just over one-third of all gilts in issue.
Mr King has asked the Chancellor for permission to create up to £150 billion of new money but only plans to use half that amount in the coming three months.
The Bank will now hold twice weekly auctions to buy in gilts worth on average £5 billion each week.
Reader views (3)
Ah; Switzerland and the sound of music.
Brown Paper Packages, tied up with strings; these are a few of my favourite things.
New Labours National Anthem.
- Mickyinlondon, london, 12/03/2009 21:41
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Beware my friends, the re-enactment of the socialist 1947 exchange control act! If you have a passport issued pre 1979 look it up on the back pages. This will be the final stages of destroying the prosperity of the passed thirty years and people will only get goods and services based of their needs decided by others. Except our political masters who will live in the lap of luxury.
it's called communism. God help us all!
- Mike, London, 12/03/2009 21:19
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The government would have been better advised to give all taxpayers a flat tax rebate across the board rather than bailing out the banks.
Those in mortgage arrears or in debt will catch up with repayments, saving thier homes or cut their debt and the money ends up in the bank.
Those with money will spend surplus cash in the shops, bringing a boost to retailers, saving jobs and the money will end up in the bank eventually.
Those that want to save the money will put the money in the bank anyway.
What is the point of giving the money to the banks when they will just fritter it away with no further benefit to the economy.
- James Lowe, London, 12/03/2009 14:30
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