Recommendations & Conclusions
9 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 …
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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 strategic framework for QT is broadly reasonable. We have also heard that shrinking the Bank’s balance sheet in order to create space for future interventions, should they be needed, and reducing distortions in the gilt market caused by quantitative easing (QE), are potential reasons for going ahead with QT.
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Government response AI summary
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.
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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 …
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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 that they are carrying out QT with a view to creating space for future balance sheet expansion, such as quantitative easing (QE), should it be needed. We also note that we have received some concern that the Bank needs a good understanding of the economic and financial impacts of QT in order to calibrate its strategy.
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Government response AI summary
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 that annual reviews are conducted …
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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 …
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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 quantitative tightening
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Government response AI summary
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 in consultation with HM Treasury …
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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. …
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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. That said, we are concerned that the Bank is taking a ‘leap in the dark’ by embarking upon a major monetary operation without specifically and separately tracking its effects. As we noted above, there is a spread of views about the appropriate pace of and risks around QT, including a risk that QT is tightening monetary conditions by more than the Bank thinks. The MPC’s ability to set the appropriate course of monetary policy could be improved if it has as full as possible an understanding of QT’s effects either at the pre-announced pace or in alternative scenarios.
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Government response AI summary
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 QT's impact and that this …
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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, …
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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, QT is an untested intervention in a gilt market that is also faced with an unusually high sustained rate of conventional gilt issuance, which could risk contributing to a financial instability event. The events of March 2020 and September 2022 have shown that the market can deteriorate rapidly.
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Government response AI summary
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 predictable, and that financial stability …
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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 …
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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 in part to create space should it need to undertake QE or another form of balance sheet expansion in future. Given what we now know, any future QE should not proceed automatically under the existing arrangements. Instead, the arrangements should be revisited in the light of the implications for value-for-money, public spending and Bank independence that we outline below.
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Government response AI summary
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 should QE be deployed again.
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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 …
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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 ongoing pace and timing of QT.
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Government response AI summary
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.
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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 …
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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 on the other hand the Chancellor’s authorisation is “accompanied by assessment of the macro-economic and fiscal impacts.”
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Government response AI summary
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.
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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 …
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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 or not there was a threshold at which the indemnity would not be provided.
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Government response AI summary
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 on value-for-money assessments, implying no …
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HM Treasury