Why squirrelling away bond purchases ain’t the answer when it comes to QE

Quantitative easing only works if central banks keep buying assets – rather than simply holding them – a Bank of England economist has written.

A blog by the Richard Harrison, a member of the Bank of England's monetary assessment and strategy division, urged central banks to resist the temptation of hanging onto assets they have bought.

Holding large quantities of assets on central banks' balance sheets in the hope of ultimately creating a condition to increase interest rates is logic that "does not hold".

Read more: Hold: The ECB keeps interest rates and QE purchases steady

"'Active’ QE improves welfare precisely because it is active," Harrison wrote.

If the central bank merely holds a fixed proportion of long-term debt on its balance sheet, then it will not replicate this feature of an active QE policy.

Harrison's argument is at the heart of a debate on whether the European Central Bank will stop buying up bonds in September next year. Some experts have argued simply holding assets creates a stimulus by lowering bond yields. Others advocated a monthly flow is paramount.

Read more: Euro rallies as ECB leaves rates unchanged

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