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The writer is chair of the House of Commons Treasury select committee
When the Bank of England voted to implement quantitative tightening in September 2022, it put the UK economy in uncharted territory — particularly in terms of the decision to actively sell gilts back to the market.
No major central bank has pursued QT in this way. Both the Federal Reserve and the European Central Bank have opted only for the passive method of allowing their bonds to mature without replacement. The absence of supporting evidence on which the Treasury committee, or indeed the BoE, can predict the impact of its QT programme is why we concluded, this week, that the plans are a leap in the dark for the British economy.
The BoE told us that it did not view QT as an active monetary policy tool, but that does not mean it will avoid having unplanned economic effects. If quantitative easing can signal to the market a period of low interest rates, QT can give the opposite impression. You can be sure investors will respond accordingly.
With the Budget just one month away, terms such as “fiscal headroom” have become fashionable around Westminster. Many will attest to the contrary, but only the Office for Budget Responsibility and the closest associates of the chancellor himself will know how much leeway for tax or public spending changes the government has before he actually stands up at the despatch box on March 6.
The committee heard during the inquiry that there may be around £130bn of losses incurred over the lifetime of QE and QT, to be paid for by the government. This figure is highly uncertain, as are almost all the attempts to quantify what comes next. But it clearly highlights a risk of extra strain on Treasury coffers. It could also expose the independent BoE to unwanted political pressure if the costs are felt in Whitehall departments.
In our report, we encourage the central bank and the Treasury to explore applying value-for-money tests to the scale and speed at which it undertakes QT. While I completely accept that the BoE’s monetary policy committee must have tackling inflation as their foremost objective, a major central bank actively reselling debt back into the market needs to consider the effects of a potential £130bn loss to the public purse.
We asked the BoE to provide figures on how pursuing active QT at a slower rate might affect those losses: their response indicated that a more gradual approach spreads losses over a longer period of time. What this shows us is that there appears to be some trade-off between the pace of QT and the government’s spending power over the next decade.
I feel I must restate the importance of the BoE’s independence from government. If the central bank and the Treasury were to explore applying value-for-money considerations to their QT programme now, it would help insulate the BoE from external pressure if losses do mount up. Avoiding such an effect is crucial because the central bank must always be free to act on its immovable institutional purpose — to retain our financial and monetary stability.
It is well-established that QE was a necessary tool for helping the UK economy keep its head above water following the 2008 financial crash. A further large dose of QE was implemented at the start of the pandemic.
In May 2023, Andrew Bailey, the governor, told the committee that QT was needed to give the central bank space if a period of QE was needed to stimulate the economy. And it’s certainly logical that the BoE’s books shouldn’t indefinitely accumulate debt.
All we have asked is that, with potentially hundreds of billions of public money at stake — with possible ramifications for government spending power — the BoE and the Treasury should consider how better to evaluate the effects of QE and QT before it’s too late.