Source · Select Committees · Treasury Committee
Recommendation 7
7
Accepted
Paragraph: 49
Quantitative Tightening presents an untested intervention amidst high gilt issuance, risking financial instability.
Conclusion
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.
Government Response 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 tools can be used independently in the event of market dysfunction.
Paragraph Reference:
49
Government Response
Accepted
HM Government
Accepted
The Bank is taking action in line with its statutory duty to protect and enhance the financial stability of the UK financial system. The FPC has also set out the actions it is taking, both domestically and in conjunction with international work, on addressing the risk of severe dysfunction in core sterling markets when there is a threat to UK financial stability.,25 26 Front and centre in this strategy was the need for stronger private self-insurance, market infrastructure and liquidity regulation. Primary responsibility for ensuring appropriate resilience to the wide and evolving range of idiosyncratic liquidity risks lies with firms themselves. This work will support the Bank’s readiness to respond to any future market stresses that might arise and threaten financial stability. The Bank’s work in this space include facilities to lend to non-bank financial institutions, for the purpose of addressing severe dysfunction in core sterling markets when there is a threat to UK financial stability and existing facilities cannot channel sufficient liquidity to the financial system as a whole.27 I would note that the Bank is working at pace to launch an initial version of this facility, which would lend cash in exchange for gilts to eligible insurance companies and pension funds (ICPFs), including associated LDI funds. Nevertheless, there may be instances where a lending facility alone is not sufficient to address market dysfunction. Alongside the work to develop the new lending facility, the Bank is working to learn lessons from the September 2022 intervention. Carrying out operations in the gilt market is a core function of the Bank that contributes towards delivering on its monetary and financial stability objectives. However, operations designed to fulfil financial stability objectives, such as those during October 2022, are different in nature to QE or QT which are conducted for monetary policy purposes and in line with the remit received by the MPC from the government. With regard to the MPC’s strategy for QT, the Committee agreed that there would be a high bar for amending the planned reduction in the stock of purchased gilts outside a scheduled annual review. That was in order to remain consistent with the design principles of QT in that gilt sales should be gradual, predictable and not disrupt financial markets. In the event of market dysfunction, tools built to address the Bank’s financial stability objective can be used without constraining the MPC’s ability to make monetary policy decisions for QT.