Rationale behind BOE QE

30 Sep, 2022
Category: Currency
Tags: GBP

Liquidity, not price is what the BOE is watching

The UK tax cut follow by unlimited bond buying in order to secure the insurance industry and pension fund had created a chaotic financial market.

UK 30 years bond, the 30-year gilts, has seen its price going up and down like a roller coaster.

But why is the market rebound so short when the Bank of England, the world's third largest central bank is taking an unlimited QE stance?

So to answer the question, I think the price is not what a central bank focuses on, it’s liquidity.

The reason for BOE to buy bonds is based on liquidity, not price. As long as the insurance companies or the pension fund are able to enter into a trade or any institution is able to dispose of their bond holdings, BOE will not take any action no matter what the price is.

Let’s see if this theory works or not. I will watch the bid-ask spread of 30 Gilts to gauge whether the liquidity is drying up or not.

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Rationale behind BOE QE

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