Source · Select Committees · Treasury Committee
Recommendation 6
6
Rejected
Paragraph: 38
Develop forecasting tools for QT impact and provide quarterly public updates to Parliament
Recommendation
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 each quarterly Monetary Policy Report, rather than at an annual review only. At these reviews, it could examine the impact of QT on the money supply and the consequences for growth and inflation.
Government Response Summary
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 remaining an active research area, but does not commit to the recommended new developments or dedicated quarterly updates.
Paragraph Reference:
38
Government Response
Rejected
HM Government
Rejected
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.