Bank of England governor upends QE unwind policy

LONDON: Bank of England (BOE) governor Andrew Bailey said the central bank should start to reverse its quantitative easing asset purchases before raising interest rates on a sustained basis, a reversal of long-standing BOE policy.

The BOE increased its bond purchase target to £745bil (Us$922bil) last week, and in March it cut its main interest rate to a record low 0.1%. But Bailey said this level of central bank asset purchases “shouldn’t always be taken for granted”.

“When the time comes to withdraw monetary stimulus, in my opinion it may be better to consider adjusting the level of reserves first without waiting to raise interest rates on a sustained basis,” Bailey wrote in an article for Bloomberg.

Under its previous governor Mark Carney, the BOE said it would raise interest rates materially before starting to sell past asset purchases back to the market, as it viewed interest rates as a nimbler policy tool.

But since the 2008-09 financial crisis the BOE has never had the opportunity to raise interest rates significantly, and Bailey said he did not want high central bank holdings of government debt to become a permanent feature.

“Elevated balance sheets could limit the room for manoeuvre in future emergencies,” he said.

Bailey also said the central bank wanted to look at the role of money market funds and the risks they had posed to financial markets at the height of recent market disorder in March.

BOE purchases of British public debt since the start of the crisis have outstripped even the record increase in government borrowing needs, prompting some suggestions – rejected by the BOE – that it is underwriting the government’s spending.

“The fact that the predominant borrowers in this emergency are governments – reflecting the essential role of the state in such a crisis – makes no difference to the underlying economics or the importance of keeping borrowing costs in line with objectives,” Bailey said.

“Far from calling into question or suspending that independence, this episode has called for a response from central banks that’s only possible because their independence gives them the freedom to operate,” he added.

Separately, Carney said there would need to be greater public and private investment as the economy came out of the coronavirus slump, to counteract potential consumer weakness and meet longer-term environmental goals, Reuters reported.

Carney, now an advisor to the British government on the United Nations COP26 climate summit next year, said the economy was only just beginning to come out of the slump caused by Covid-19, and it was too soon to know the long-term damage.

“Consumer attitudes and narratives are unlikely to be as aggressive, and borrowing – apart from necessary borrowing – is unlikely to be as high. There is going to be a need for public and private investment,” he told the BBC. — Reuters

“Elevated balance sheets could limit the room for manoeuvre in future emergencies.” Andrew Bailey