After all, the seminal Friedman description of monetarist transmission starts from the premise that money is an imperfect substitute for a wide range of financial and real assets, including bonds, equity, physical capital and durable goods. [12] A policy-induced injection of money into the economy in that setting triggers a train of complex and inter-related portfolio rebalancing across sectors. These affect spending and pricing decisions both directly (via the impact of asset price changes on wealth and substitution between holdings of financial and real assets (such as durable goods)) and indirectly (via changes in asset prices, yields and spreads – a broad measure of ‘financial conditions’ – that are relevant to expenditure decisions). Substitution from money holdings directly into consumer spending has formed one part of our assessment of whether savings accumulated in the household sector during the pandemic lockdowns will spur or sustain aggregate demand. The monetary overhang held by the household sector is potentially an important influence over spending and saving decisions in the face of the current real income squeeze, even though the consumption boom anticipated by some last year on account of it has failed to materialise thus far. But, reflecting the changes in financial structure I mentioned earlier, our starting point is that the strongest channel of QE transmission operates through portfolio rebalancing within the financial  Page 10  sector. Indeed, one of the conclusions of the recently published Bank survey is that QE is mainly transmitted via changes in asset prices and yields that follow from these effects.

For this reason, when making an assessment of the likely impact of asset purchases, the Committee did not factor in a material expansion of bank lending. Indeed, our asset purchases were designed to facilitate a disintermediation of corporate financing away from banks and toward capital markets. This disintermediation was supported in part by the portfolio rebalancing triggered by our gilt purchases. As investors’ demand for alternative assets such as corporate bonds and equities increased, the ability of businesses to raise finance in capital markets improved and the cost fell. This disintermediation was reinforced by the Bank’s operations to improve the functioning of corporate credit markets. The financial market dislocation in the immediate aftermath of the crisis hindered the functioning of the commercial paper and corporate bond markets and led to substantial increases in liquidity premia. In response, the Bank established facilities to make small regular purchases of corporate bonds and commercial paper, with the aim of aiding secondary market liquidity. The significance of these purchases of private sector debt should not be judged by their scale, which was tiny in comparison to gilt purchases. The purpose of these operations was not to purchase a specific quantity of assets, but rather to improve the functioning of those markets. In that respect, the knowledge that the Bank stands ready to purchase assets may be as beneficial as actual purchases. 5 The importance of expectations also played a central role in the design of our asset purchase programme.