Recommendations & Conclusions
22 items
1
Conclusion
Fifth Report - Quantitative Tightening
Accepted
There are a variety of views about the desirability of the Bank of England undertaking quantitative tightening (QT), whether it has a good strategic framework for doing so, and whether it is conducting QT at an appropriate pace. Nonetheless, much of the evidence we have received suggests that the Bank’s …
Government response. The Bank welcomes the committee's finding that its strategic framework for QT is broadly reasonable and reiterates its existing strategy, guided by three key principles, for unwinding asset purchases.
HM Treasury
2
Conclusion
Fifth Report - Quantitative Tightening
Accepted
Since it has some bearing on our later conclusions, we note here that the Bank and Monetary Policy Committee (MPC) have determined: that QT is not being used as an active tool of monetary policy; that they are calibrating QT in order to minimise its economic and financial impacts; and …
Government response. The government's response outlines the MPC's existing strategy for unwinding asset purchases, guided by principles such as using Bank Rate as the primary tool and conducting QT gradually. They explain that the MPC's framework for monetary policy is robust and …
HM Treasury
3
Conclusion
Fifth Report - Quantitative Tightening
Acknowledged
One area in which the Bank’s strategy is less well established regards the long-term steady-state size and composition of its balance sheet, which may have a bearing on the longer-term conduct of QT and which, as we note later, may have implications for fiscal as well as monetary and financial …
Government response. The government acknowledges the issues regarding the long-term size and composition of the Bank's balance sheet. They refer to previous communications outlining potential compositions and state that the Treasury is engaging with the Bank on these issues, noting that international …
HM Treasury
4
Recommendation
Fifth Report - Quantitative Tightening
Accepted
The Bank should develop its planning on this long-term steady-state size and composition of its balance sheet, and how this relates to QT, in more detail and give regular public updates on the likely future size and composition of its balance sheet. (Paragraph 23) The macroeconomic and financial impact of …
Government response. The government states the Bank is continuing to analyse the optimal steady-state level of reserves and is undertaking work to determine the long-term mix of assets for its balance sheet. Decisions on its future size and shape will be made …
HM Treasury
5
Conclusion
Fifth Report - Quantitative Tightening
Accepted
QT is a comparatively untested monetary policy tool, and it is understandable that the Bank would find it challenging to model its effects as part of its forecast. We have seen supporting evidence for the Bank’s contention that it is having and will have a small impact on the economy. …
Government response. The government explains that the MPC already takes QT's impact into account through asset price assessments, annual reviews, and regular monitoring in reports and minutes. They state that Bank staff use various modelling tools and conduct quantitative analysis to estimate …
HM Treasury
6
Recommendation
Fifth Report - Quantitative Tightening
Rejected
The Bank should develop its forecasting and modelling tools for understanding the impact of QT and look to how these can be integrated into the forecasting and communication process. Given the uncertainty over its effects, the Bank should also Quantitative Tightening 35 update Parliament and the public on QT at …
Government response. The government states the MPC considers QE/QT impact in annual reviews, which it deems appropriate, and includes assessments in quarterly reports. It also notes that Bank staff already use various modelling tools and quantitative analysis for QT impact, with this …
HM Treasury
7
Conclusion
Fifth Report - Quantitative Tightening
Accepted
There are no clear signs that QT has resulted in financial stability issues to date, either in the gilt market or more widely. We also recognise that bringing down the share of gilts owned by the Bank in favour of the private sector could improve liquidity in financial markets. Nonetheless, …
Government response. The government explains that the Bank and FPC are already taking action to protect financial stability, including providing facilities for non-bank institutions and addressing market dysfunction. They clarify that QT is conducted for monetary policy, designed to be gradual and …
HM Treasury
8
Recommendation
Fifth Report - Quantitative Tightening
Acknowledged
The Bank is right to work on a new backstop facility to reduce the chance of having to resort to gilt purchases in future, and given that QT is ongoing, it should work on this as a priority. In the meantime, it should consider whether a fully developed and transparent …
Government response. The government outlines the Bank's and FPC's ongoing work to enhance financial stability through private self-insurance, market infrastructure, and liquidity regulation, and mentions facilities to lend to non-bank institutions, emphasizing that financial stability tools can be used without constraining monetary …
HM Treasury
9
Recommendation
Fifth Report - Quantitative Tightening
Rejected
Given the unusually high extent of gilt sales in the coming years, the Bank and the Debt Management Office should publish more frequent updates on gilt market participant demand and sentiment. (Paragraph 51) The fiscal impact of quantitative easing and tightening
Government response. The government states the Bank already publishes aggregate gilt market demand and auction results, and surveys market participants. However, it rejects the recommendation for the DMO to publish market sentiment updates, arguing it risks negatively impacting market behaviour and falls …
HM Treasury
10
Conclusion
Fifth Report - Quantitative Tightening
Acknowledged
Notwithstanding the need to ensure that the programmes are compatible with the operational independence of monetary policy, it strikes us as highly anomalous that decisions have been and are being taken about QE and QT concerning huge sums of public money without any regard to the usual value-for-money requirements. This …
Government response. The Bank recognises the committee's concerns regarding value for money and clarity, stating its operations are designed to maximise value for money by minimising cost and risk over the lifetime of the APF, subject to policy objectives.
HM Treasury
11
Recommendation
Fifth Report - Quantitative Tightening
Accepted
We recognise that QE and QT are processes already well in train, and it may not be possible to make large changes to the arrangements made in 2009 and 2012 without impacts on the credibility of the UK macroeconomic framework. However, as we have noted, the Bank is undertaking QT …
Government response. The government clarifies that future QE would not proceed automatically, as the Chancellor must authorise APF increases based on value-for-money assessments and Accounting Officer advice. It commits to keeping its approach to managing cashflows under review and considering lessons learned …
HM Treasury
12
Conclusion
Fifth Report - Quantitative Tightening
Rejected
While the Governor played down the impact that decisions over the pace of QT have on the scale of lifetime gains and losses arising from QE and QT, the evidence presented to us shows that there is some trade-off between the two, and more so 36 Quantitative Tightening in terms …
Government response. The government reiterates that Bank Rate is the primary active monetary policy tool and that the MPC discusses QT parameters annually. It asserts there is little evidence that a different QT pace would significantly alter overall cashflows or total costs …
HM Treasury
13
Recommendation
Fifth Report - Quantitative Tightening
Accepted
That being so, while it is right that MPC members should have monetary policy and the inflation target foremost in their thinking and decision-making, the Bank and Treasury should explore how criteria on value for money and the spending power of the Treasury could be included in decisions about the …
Government response. The government clarifies that while MPC decisions are independent, the Bank's operational implementation of QT already prioritizes value for money by minimising cost and risk over the APF's lifetime, subject to MPC objectives, through mechanisms like auction design.
HM Treasury
14
Conclusion
Fifth Report - Quantitative Tightening
Acknowledged
It is right to say that the overall effectiveness and value-for-money of QE and QT should be judged by their wider macroeconomic impacts on inflation, growth, and employment, rather than on the direct fiscal costs alone. There is agreement among many that certain rounds of QE, especially the initial rounds, …
Government response. The Bank acknowledges the committee's observation on judging QE/QT effectiveness by wider macroeconomic impacts, but emphasizes that ongoing evaluation of monetary policy decisions for value for money would hinder MPC independence, while confirming the framework design remains under review.
HM Treasury
15
Recommendation
Fifth Report - Quantitative Tightening
Rejected
In its response to this report, the Bank should set out whether it thinks that all individual rounds of QE have proved to be good value for money considering the later fiscal cost. In any future QE, lessons should be learned about the effectiveness of each round of QE over …
Government response. The Bank rejects the recommendation to assess the value for money of individual QE rounds, asserting the MPC's independence from fiscal considerations; however, the Treasury commits to keeping its approach to cashflow management under review and considering lessons learned should …
HM Treasury
16
Conclusion
Fifth Report - Quantitative Tightening
Accepted
The Chancellor’s role in approving changes in the size or composition of the APF that houses the QE and QT programme remains unclear to us, since on one hand the Chancellor insists that decisions over QE and QT are taken independently by the MPC and cannot be commented upon, while …
Government response. The government clarifies the Chancellor's role, explaining that while the MPC maintains operational independence, the Chancellor's authorisation for APF indemnity relates to Treasury's responsibility for public funds, involving assessments of fiscal and macroeconomic impacts.
HM Treasury
17
Recommendation
Fifth Report - Quantitative Tightening
Accepted
The Treasury should clarify whether the Chancellor’s authorisation of changes to the APF involves a substantial decision or is only a formal endorsement of the MPC’s decision, and explain the extent of the assessment of macro-economic and fiscal impacts that accompanies each authorisation. In particular, the Treasury should confirm whether …
Government response. The government clarifies that the Chancellor's authorisation of APF changes focuses on the increased contingent liability and supports MPC independence, with risk assessment differing for expansion versus unwind. It confirms that decisions to approve indemnity increases are made case-by-case based …
HM Treasury
18
Conclusion
Fifth Report - Quantitative Tightening
Not Addressed
We have received proposals for interventions that would cut the remuneration of bank reserves and thereby reduce the ongoing losses arising from QE and QT. However, we have also received evidence that cutting remuneration now could be similar to a default, and that any scheme tied to commercial banks’ holdings …
Government response. The government discusses the cashflows between HM Treasury and the APF, highlighting the transparency of the Bank's reporting and the wider economic impacts of QE and QT. The response does not directly address the committee's conclusion that it does not …
HM Treasury
19
Conclusion
Fifth Report - Quantitative Tightening
Acknowledged
Some witnesses thought that the remuneration of reserves would need to be reconsidered once reserves had reached their future steady-state level. However, there is a lack of information about future arrangements for the Bank’s balance sheet once the steady-state level of reserves is reached. (Paragraph 82) Quantitative Tightening 37
Government response. The government clarifies the Bank's arrangements for normalising its balance sheet, detailing the role of liquidity facilities as reserves fall. It states that the Bank is continuing to analyse the optimal steady-state level of reserves for monetary and financial stability.
HM Treasury
20
Recommendation
Fifth Report - Quantitative Tightening
Deferred
The Bank and Treasury should clarify the future arrangements for the steady-state level of reserves on the Bank’s balance sheet as soon as possible, including the future of QT at that point, the assets that will be used to back reserves, the remuneration of those reserves, and the implications for …
Government response. The Bank acknowledges the need to clarify future arrangements for the steady-state level of reserves and states it is 'continuing to analyse' the optimal level, with decisions to be made in close consultation with HM Treasury and communicated transparently.
HM Treasury
21
Conclusion
Fifth Report - Quantitative Tightening
Acknowledged
QE and QT losses, the fiscal rules, the regular remittances of profits arising from QE from the Bank to the Treasury and indemnity payments to cover losses from the Treasury to the Bank interact to create direct and immediate links between monetary policy decisions and fiscal policy. The current losses …
Government response. The government acknowledges that monetary policy decisions have fiscal implications but stresses the importance of the Bank of England's operational independence. It explains that the current arrangements, including the MoU and transparent APF cashflows, are designed to manage these interactions, …
HM Treasury
22
Recommendation
Fifth Report - Quantitative Tightening
Rejected
The Treasury should examine whether it is appropriate that ongoing indemnity payments are included in the debt targeted by the fiscal rules, subject to maintaining the credibility of the UK’s macroeconomic framework. For any future rounds of QT, the Treasury and Bank should commit to revisiting whether it would be …
Government response. The government rejects the recommendation to exclude indemnity payments from fiscal rules, stating substantial fiscal costs should not be ignored. It also explains that a deferred asset approach for accounting profits and losses is not feasible due to the UK's …
HM Treasury