Source · Select Committees · Treasury Committee
Recommendation 12
12
Rejected
Paragraph: 69
Bank and MPC underestimate trade-offs between QT pace and annual losses.
Conclusion
While the Governor played down the impact that decisions over the pace of QT have on the scale of lifetime gains and losses arising from QE and QT, the evidence presented to us shows that there is some trade-off between the two, and more so 36 Quantitative Tightening in terms of annual losses. Furthermore, the Bank and MPC do not consider QT to be an active tool of monetary policy and think that it has minimal economic and financial impacts.
Government Response Summary
The government reiterates that Bank Rate is the primary active monetary policy tool and that the MPC discusses QT parameters annually. It asserts there is little evidence that a different QT pace would significantly alter overall cashflows or total costs from the APF, though it impacts the timing of losses.
Paragraph Reference:
69
Government Response
Rejected
HM Government
Rejected
First, Bank Rate is the preferred active policy tool for adjusting the monetary policy stance... 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. Further, with a given set of market determinants there is little evidence that a different pace of sales would reduce cashflows between HMT and the APF or achieve better value for money. Profits or losses from QT are driven in the first instance by movements in gilt prices and Bank Rate. As demonstrated by the Bank in its quarterly APF reports, different APF unwind paces will impact the time profile of when losses are incurred but are expected to have little effect on total cost in present value terms. Therefore while a faster pace of sales will realise losses sooner, all else equal, holding gilts for longer is unlikely to avoid these losses. Instead a higher net interest cost is incurred from holding the portfolio for longer (where Bank Rate paid on reserves is higher than coupon income).