Source · Select Committees · Treasury Committee
Recommendation 5
5
Accepted
Paragraph: 37
Bank of England lacks specific tracking of quantitative tightening's economic impacts
Conclusion
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.
Government Response 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 remains an active research area for the Bank and other central banks.
Paragraph Reference:
37
Government Response
Accepted
HM Government
Accepted
The MPC continues to take the impact of QE and QT into account through its assessment of asset prices and through the scheduled annual review of the QT programme. While the MPC judges annual reviews to be appropriate in line with the principles outlined above, the quarterly Monetary Policy Reports and the minutes of each MPC meeting contain assessments of asset price developments which incorporate the effects of QT. The Bank is constantly monitoring market liquidity and functioning, drawing on a combination of market intelligence and data analytics, as set out in a number of publications.15 This monitoring is also mindful of the wider drivers of money and inflation in the economy. The impact of asset purchases on monetary developments is included as part of its regular assessment in Monetary Policy Reports and MPC minutes. Bank staff have used various modelling and forecasting tools and undertaken a range of quantitative analysis to estimate the impact of QT to date, as detailed in Box A of the August 2023 Monetary Policy Report. The tightening impact of unwind has been, and is expected to be, smaller than the loosening associated with asset purchases: the impact of QE in the past cannot be mechanically applied to measure the impact of QT, simply with the sign reversed. That predominantly reflects the state contingency of the transmission channels, as set out for the asset purchases in the 2022 Q1 Quarterly Bulletin.16 As such, when unwind is conducted in a manner consistent with the key principles the MPC have set out, several transmission channels are expected to be and intended to be smaller or absent. The empirical evidence so far continues to support prior expectations that the unwind would have some tightening effect on financial conditions, but that this would be small, although there is uncertainty about the precise measures.17 Given this uncertainty, this continues to be an active area of research both in the Bank and other central banks and in academia and the MPC will continue to learn from it.