Following completion of the further £75 billion of gilt purchases announced last week, the UK’s QE operation will be 43% larger in relation to GDP than the US programme, and two and half times the size of Japan’s intervention in the early 2000s.

The additional £75 billion will lift the securities holdings of the asset purchase facility (APF) to £275 billion, or 18.3% of estimated 2011 GDP, up from 13.3% currently. For comparison, the Fed’s securities holdings have risen by $1,919 billion since 30 June 2007, before the financial crisis, equivalent to 12.8% of 2011 US GDP.

This comparison, moreover, ignores the longer average maturity of the UK holdings, implying a larger transfer of interest rate risk from the market to the central bank. The Fed expects the average maturity of its securities to rise from 75 months currently to about 100 months, or 8.3 years, following the completion of “operation twist”, involving sales of shorter-term Treasuries to finance buying of longer maturities. The average maturity of the APF’s holdings is more than 10 years currently and should be sustained by the additional purchases, which will be spread evenly between the 3-10 year, 10-25 year and over 25 year sectors.

For comparison, the Bank of Japan’s holdings of Japanese government securities rose by ¥36 trillion between 31 December 2000 and 31 December 2004, equivalent to 7.2% of Japanese GDP in 2004. The ECB, meanwhile, has bought €222 billion under its covered bond purchase and securities markets programmes, equal to 2.4% of 2011 GDP.

The larger scale of QE in the UK, even before the additional £75 billion, has contributed to solid growth of nominal GDP – 8.4% in the two years to the second quarter of 2011, the same as in the US and above a 5.9% increase in the Eurozone, with Japan contracting by 2.3%. The inflation / real GDP split, however, has been unfavourable – real GDP rose by only 2.8% over the two years versus 5.0% in the US, 3.8% in the Eurozone and 2.2% in Japan. The UK’s underperformance casts doubt on the Bank of England’s claim that QE1 had a larger impact on real GDP than prices.

Previous posts have argued that UK QE2 was unjustified because – in contrast to the position when QE1 was launched in early 2009 – current economic woes do not reflect a shortage of money. QE2 should prove more powerful than QE1 because the “transmission mechanism” has been partially restored by the financial recuperation of the last two years – questioning the view that the programme will need to be expanded significantly further. “Excess” liquidity created by the policy, however, may serve to buoy asset prices and – by suppressing sterling – sustain above-target inflation rather than provide a meaningful lift to economic activity.