Source · Select Committees · Treasury Committee
Recommendation 8
8
Acknowledged
Paragraph: 50
Prioritise developing a new backstop facility and transparent contingency for suspending Quantitative Tightening.
Recommendation
The Bank is right to work on a new backstop facility to reduce the chance of having to resort to gilt purchases in future, and given that QT is ongoing, it should work on this as a priority. In the meantime, it should consider whether a fully developed and transparent contingency is needed should it have to go further and suspend QT and/ or resort to gilt purchases, as it had to on an improvised basis in September 2022.
Government Response Summary
The government outlines the Bank's and FPC's ongoing work to enhance financial stability through private self-insurance, market infrastructure, and liquidity regulation, and mentions facilities to lend to non-bank institutions, emphasizing that financial stability tools can be used without constraining monetary policy decisions for QT.
Paragraph Reference:
50
Government Response
Acknowledged
HM Government
Acknowledged
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.