The local supply channel of QE: evidence from the Bank of England’s gilt purchases

One way quantitative easing (QE) purchases of government bonds by central banks may affect the yield curve is by creating scarcity in the purchased securities, leading to an increase in their prices or equivalently a reduction in their yields. We analyse and compare the importance of this so-called 'local supply' (or scarcity) channel across all of the Bank of England’s QE government bond purchase programmes during 2009 to 2020. We find strong evidence overall for the role of the local supply channel in explaining gilt yield reactions both to QE announcements ('ex ante'), as well as after purchases have begun ('ex post'). The largest impact on the yield curve through local supply seems to have been in response to the initial QE1 announcements in 2009, both in terms of total impact (the impact of the announced programme), marginal impact (the impact of a given amount of purchases) and relative impact (the proportion of the total change in yields explained). Our findings also imply there may have been an increase in the relative importance of other channels and/or policies over time.