Recommendation 13

HM Government Accepted

The Committee highlighted value for money and the importance of considering HM Treasury spending power throughout QT. First, we would like to set out a distinction between the decisions taken by the MPC and the operational implementation of QT by the Bank Executive. The MPC has statutory independence to set monetary policy to pursue its objectives, as set in law and specified by the government. As above, the separation of fiscal and monetary policy is a key feature of the UK’s economic framework and essential for the effective delivery of monetary policy. This applies to conventional monetary policy (setting Bank Rate) and unconventional monetary policy, such as QE and QT, where the Treasury’s indemnity of the APF has more direct fiscal effects. It is right that fiscal incentives do not influence the MPC’s decision making, because actual or perceived fiscal influence on monetary policy decisions could result in significant costs to UK macroeconomic credibility. Bank of England independence and the ability to credibly signal a commitment to price stability has helped achieve lower rates of inflation on average since independence was granted. 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). In addition, and as noted by the OBR, QT will help re-insulate the public finances against changes in borrowing costs by reversing the effect of QE on the UK’s average debt maturity. More broadly, the independent MPC has been clear in its three principles underpinning QT. These set out the use of Bank Rate as the active monetary policy tool, the intention to conduct sales so as not to disrupt the functioning of financial markets, and conducting sales in a relatively gradual and predictable manner. By increasing predictability for market participants, for example through publication in advance of a gilt sales calendar and setting out the operational terms for QT sales, this approach should minimise any potential impact on the gilt market. The MPC’s QT principles provide the market with clarity and predictability over the long term, helping to minimise cost and risk in the implementation of QT and support value for money. The Treasury works closely with the Bank of England to ensure value for money in the implementation of QT. Once decisions on the pace of unwind and the key principles around them are made by the MPC, the Bank Executive is responsible for implementing the policy. The Governor’s letter to the Chancellor on 28 April 2023 outlines existing measures in place and states that, subject to meeting the independent MPC’s policy objectives, the Bank’s operations in respect of the APF are governed, designed and risk managed with the aim of minimising cost and risk. The measures include designing its gilt auctions to maximise demand and competition with multi-stock auctions and built-in price protections. The Bank also liaises closely with the Debt Management Office (DMO) to ensure its operations do not impact on the government’s wider gilt issuance strategy. This is accompanied by comprehensive governance, reporting and transparency arrangements with the Treasury. Nonetheless we recognise the Committee’s concerns regarding clarity of who and how value for money considerations are taken into account. The Bank has made clear that its operations, as carried out by the Bank Executive, should maximise value for money by minimising cost and risk over the lifetime of the APF, subject to achieving the MPC’s chosen unwind target and in line with the MPC’s key principles. That being so, the recommendation in paragraph 13 asks about criteria on ‘value for money’ in the context of QT. Subject to the MPC’s policy objectives, ‘value for money’ is reflected in the Bank’s operations, that are governed, designed and risk managed with the aim of minimising cost and risk. I set these out in more detail in my letter to the Chancellor in April 2023. For instance, the use of auction mechanisms that are carefully designed to maximise demand and competition. This allows us to accept only the best-priced bids across a range of bonds and participants. APF auctions also have built-in price protections and controls.