UK: Deloitte Monday Briefing: Tightening Monetary Policy Without Killing The Patient

Last Updated: 2 July 2013
Article by Ian Stewart

Most Read Contributor in UK, August 2017
  • Global asset prices have been propped up for the last five years by easy monetary policy. Recent turbulence in financial markets highlights the dilemma facing policymakers as they contemplate taking away the punchbowl of cheap money.
  • On 22nd May, US Federal Reserve's Chairman, Ben Bernanke, sent shock waves through equity markets by suggesting the Fed might slow its programme of quantitative easing (QE), which has involved huge purchases of US government bonds. Mr Bernanke reiterated the message in mid-June, causing a further sell off in equity and bond markets.
  • Markets worry that an end to Fed bond buying will reduce their price and force up interest rates on bonds. The result will be less liquidity in the system and higher interest rates.
  • The change of course in US policy has coincided with a growing cash crunch in China, caused by a tightening of policy designed to restrain reckless lending.
  • The shift of policy in the US and China aims to take the steam out of overheated asset markets.
  • Policymakers also want to get markets used to the idea that ultra-loose monetary policy is not here to stay. As Richard Fisher, a member of the Federal Reserve's interest rate setting committee, put it last week, it makes "sense to socialise the idea that quantitative easing is not a one-way street".
  • Markets have reacted strongly to the prospect of an end to loose monetary policy. Chinese equities fell by 17% between 22nd May and the low on 23rd June. US Treasury bonds lost 4% of their value, taking interest rates on US bonds to the highest level in almost two years. Interest rates on US 30-year mortgages have risen from 3.5% to 4.5% in just a month. 
  • The effects have not been confined to the US and China. Equities have fallen everywhere, with the UK's FTSE100 down 12% from its May highs. Market expectations for UK base rates at the end of 2016 rose 100 basis points between the start of May and late June. Government bonds in safe markets like Germany and riskier ones like Greece, have sold off. Investors last week withdrew a record $23.3 billion from global bond funds. Emerging markets have been hard hit by the change in sentiment with the South African rand at a five-year low against the dollar and the Indian rupee close to a 20-year low.
  • While policymakers wanted to dampen the excesses caused by easy monetary policy, they do not like panics and they certainly do not want to kill the patient. As the Fed's Mr Fisher put it last week, "I don't want to go from Wild Turkey to cold turkey overnight".
  • So, in the last few days, central banks have struck a more soothing tone. The Federal Reserve has sought to calm markets by saying that the pace at which QE is slowed, or tapered, depends on data. Officials point out that Mr. Bernanke said that the Fed would end its asset purchases only if US unemployment falls below 7% (the current rate is 7.6%).
  • Last Tuesday, the outgoing Bank of England, Sir Mervyn King, said markets had "jumped the gun" in thinking that Central Banks were close to raising interest rates. And the People's Bank of China has said it will provide funding support to any banks that face temporary funding shortages.
  • The soothing words have duly worked their magic, helping bolster equities last week.
  • The dilemma for central banks is that the premature ending of QE risks renewed recession. But if they wait too long, they risk creating asset bubbles and inflation.
  • Policymakers hope that by signalling shifts in policy well in advance they can ensure a gradual and orderly adjustment to reduced monetary stimulus.
  • Our guess is that, in finessing this task, central banks are likely to be more concerned about growth than quashing asset bubbles. The ghost that seems to haunt policymakers is that of the Great Depression of the 1930s, not the great inflation of the 1970s.
  • Central bankers know that the premature withdrawal of monetary stimulus in the US triggered a double-dip recession in 1937-38. The Bank of Japan made the same mistake in 2006.
  • Most recessions are preceded by heady growth, plentiful credit and soaring asset prices. The challenge for central banks today is a very old one - to get growth going without sowing the seeds of the next credit boom.


UK's FTSE 100 ended the week up 1.6%.

Here are some recent news stories that caught our eye as reflecting key economic themes:


  • UK retailer Sports Direct is in talks with Tesco to take excess space in some of Tesco's largest stores
  • The BBC has tapped financial markets for the first time to raise ÂŁ160 million to finance expansion by BBC Worldwide
  • Mortgage approvals by UK banks have risen by almost 25% over the last year
  • Inward investment to the UK rose by 22% last year
  • Issuance of convertible bonds in the US is rising at the fastest rate since the financial crisis, with corporates attracted by the low financing costs
  • Research by the FT shows that the average pay of top bankers in the US and Europe dropped by 10% last year
  • Investors pulled $23.7bn from US bond funds in the 4 weeks to the end of June - the largest withdrawals since October 2008, in anticipation of a slowing of America's quantitative easing  programme
  • The Bank of England warned that financial institutions needed to "ensure that they have a richer understanding of the scale of risks from abrupt shifts in interest rates or from mispriced risk"
  • US house prices recorded their largest year-on-year rise in 7 years in April, with sales of new houses rising to a near 5 year high in May
  • US consumer confidence rose in May to its highest level in more than 5 years
  • The price of gold fell to its lowest level in nearly 3 years, putting the metal on track for its largest quarterly fall since 1971
  • Haringey council, in London, banned access to payday loan companies' websites at all council buildings in a bid to protect residents from "the pitfalls of excessive interest rates"
  • UK household saving rates fell to 4.2% of disposable income in Q1 2013, the lowest level since Q1 2009, due to squeezed incomes and rising prices
  • Estimates of Britain's shale gas reserves more than doubled after higher-than-expected reserves were found in Bowland Shale, which covers 11 counties in northern and central England
  • Global cyber-crime is a greater concern for UK bank chiefs than the eurozone crisis, according to Andrew Haldane - the Bank of England's director of financial stability
  • Eurozone finance ministers agreed new "bail-in" guidelines for bank rescues, to ensure losses are born by bank shareholders, bondholders and some large depositors, and not taxpayers
  • French president Francois Hollande said that France may miss its 3.7% annual deficit target by the end of the year if growth remained as weak as it currently is
  • Co-operative businesses have reached an all-time high according to a report by Co-operatives UK, with 15.4 million members, an increase of 36% since 2008
  • PayPal announced that it is working with the SETI Institute, which explores evidence of life in the universe, to plan how commerce might function in space, with the advent of space tourism
  • Japanese mobile operator SoftBank acquired a 78% stake in US-firm Sprint Nextel for $21.6bn, the largest overseas takeover by a Japanese company
  • Danish health and beauty retailer Matas became the first Danish company to launch an IPO in 2 years, in the 3rd largest European listing of the year
  • A Japanese pensioner is suing the national broadcaster NHK for "emotional distress", blaming the broadcaster's use of words borrowed from English, which can often be impossible to translate in to Japan's phonic structure - lost in translation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.