Source · Select Committees · Treasury Committee
Recommendation 1
1
Accepted
Paragraph: 20
Bank of England's strategic framework for quantitative tightening is broadly reasonable
Conclusion
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.
Government Response 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.
Paragraph Reference:
20
Government Response
Accepted
HM Government
Accepted
The Bank welcomes the report and its broad finding that the Bank’s strategic framework for QT is reasonable. Before addressing each of the specific recommendations made in the report (in the Annex to this letter), I would like to make a few general points in response to the Committee’s findings. The MPC’s strategy for unwinding the stock of asset purchases was outlined in the August 2021 Monetary Policy Report. This strategy is guided by three key principles. First, Bank Rate is the preferred active policy tool for adjusting the monetary policy stance. Second, sales of assets accumulated during QE should be conducted in a manner that does not disrupt the functioning of financial markets. And third, sales of assets should be conducted in a gradual and predictable manner over time. The MPC’s preference for using Bank Rate as its active policy tool derives from its view that such actions are more effective and operationally simpler to implement. This preference is also based on long experience of using Bank Rate. On this basis, the MPC has developed a greater understanding of how changes in Bank Rate affect the economy, relative to its knowledge of the impact of other monetary policy tools. The MPC views the impact of QE and QT on the economy and inflation as working largely through their effects on asset prices. The MPC regularly reports discussion and analysis of market and asset price developments in the Monetary Policy Report and in the minutes of its meetings. In doing so, the MPC offers an assessment of how QE and QT are influencing the outlook for the economy and inflation, embedded within an overall analysis of the evolution of monetary and financial conditions. To the extent that QE and QT work through their influence on asset prices and financial conditions, their impact is incorporated into the MPC’s quarterly macroeconomic forecasts, which are conditioned on those asset prices. By ensuring that QT is announced transparently and conducted in a predictable manner, asset prices should incorporate any impact from an anticipated reduction in the stock of asset purchases, just as they incorporate other macroeconomic news and developments.