Source · Select Committees · Treasury Committee
Recommendation 2
2
Accepted
Paragraph: 21
Bank of England calibrates quantitative tightening to minimise impacts and create future space
Conclusion
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.
Government Response 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 to support predictable QT decisions.
Paragraph Reference:
21
Government Response
Accepted
HM Government
Accepted
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. In this setting, decisions on Bank Rate that are based on the MPC’s macroeconomic forecasts will naturally take any impact of QT on monetary and financial conditions into account. And since the forecasts are conditioned on prevailing asset prices, the MPC’s framework for conducting monetary policy is robust to the uncertainties in the transmission of QE and QT decisions that we inevitably face. Given the preference to use Bank Rate as the active policy tool on a meeting-to-meeting basis grounded in these arguments, it is natural that the MPC discusses the parameters governing its QT programme on a less frequent basis, in the form of a scheduled annual review. In addition, annual reviews serve the purpose of supporting gradual and predictable decisions on the QT programme in line with the key principles outlined above. Decisions on the target stock of assets held for monetary policy purposes in the Bank’s Asset Purchase Facility (APF) are taken independently by the MPC. These decisions are taken solely to meet the 2% inflation target. The APF is indemnified by HM Treasury to ensure that the MPC can take its decisions in this way, in line with its statutory price stability objective and the remit given to it by the Government.