This week, Bank of England has decided that the economy needs another round of QE and agreed to inject a further £50bn of monetary easing via Gilts purchasing.
On surface, it looks logical that more money in the financial systems, leads to more money in circulation but economists have argued about the effectiveness of the QE1 and QE2 since central banks in developed economies went full throttle into it 3 years ago as a means to fix the financial systems.
However, one thing for sure, by driving up the price of gilts, the Treasury is depressing the yield of these bonds and the income received by pension funds and annuity payouts. Pension funds and insurance companies who are already heavily under-weight equities, will have more reason to buy into the current equity rally when they next meet in their monthly asset allocation committees in February.
Note these committees didn't meet in Dec and when back in Jan, the market was already 7-10% ahead, so a pull-back in the equity markets would probably see the long funds and insurers scrambling back in...
Eric Tan
London
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