Quantitative Tightening

This is a House of Commons Committee report, with recommendations to government. The Government has two months to respond.

Fifth Report of Session 2023–24

Author: Treasury Committee

Related inquiry: Quantitative Tightening

Date Published: 7 February 2024

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Contents

1 Introduction

1. Quantitative tightening (QT)—the winding down of the Government debt held at the Bank of England—has begun only recently. In February 2022, the Bank of England’s Monetary Policy Committee (MPC) voted to embark upon QT. The process of reducing the Bank’s stock of gilts purchased under its quantitative easing (QE) programme had commenced in 2009. The switch to QT followed a strategy published in August 2021. Initially, this took the form of ceasing to reinvest maturing gilts, referred to in this report as ‘passive’ QT (the MPC also voted to sell its much-smaller stock of corporate bonds—in this report, QT and QE refer only to gilt purchases and sales). In September 2022, the MPC voted to begin selling the Bank’s stock of QE gilts in the secondary market, following a strategy published the previous month, referred to in this report as ‘active’ QT.1 In winding down its gilt holdings, the Bank is withdrawing the reserve deposits held by commercial banks by the equivalent amount.

2. The launch of active QT was originally planned for October 2022, but was postponed amid the outbreak of the financial crisis related to the liability-driven investment (LDI) strategies of defined-benefit pension funds. Active QT eventually commenced on 1 November 2022.2

3. The Bank is still in the relatively early stages of QT. As of 31 January 2024, the Bank’s stock of gilt purchases, as measured by the price at which they were bought, stood at £738 billion, down from £875 billion at the onset of QT (of the £20 billion in corporate bonds purchased at the onset, less than £1 billion remained). In September 2023, the MPC decided to undertake an additional £100 billion of QT over October 2023 to September 2024 (with passive and active QT accounting for around £50 billion each), which will bring the purchases of gilts down to around £650 billion.3

4. The Bank was among the first central banks in the world to embark upon active QT, and international experience in passive QT is also limited.4 Indeed, other major advanced-economy central banks, including the US Federal Reserve, European Central Bank and the Bank of Canada, are only proceeding with passive QT. As Andrew Hauser, the Bank’s Executive Director for Markets, told us at the outset of active QT, “it is innovative for all central banks.”5

5. Given the untested nature of QT and its being undertaken against a challenging economic backdrop, we held an inquiry investigating various aspects of QT including its economic and financial stability impact and its (and QE’s) fiscal consequences. We have also discussed QT and QE at our regular evidence sessions with Bank officials, while our predecessor Committees have held inquiries into QE.6

6. The gilts and bonds purchased under QE are not held on the Bank’s core balance sheet but in a wholly-owned subsidiary, indemnified by the Treasury, called the Asset Purchase Facility (APF). For brevity and clarity, this report mostly refers to ‘the Bank’s stock of gilts’ in place of ‘the APF’s stock of gilts’ or ‘the Bank’s balance sheet’ to mean the Bank’s balance sheet including the APF, but the APF is also referred to where it is clearer to do so.

Box 1: What are quantitative easing and quantitative tightening?

Bank Rate is the Bank’s primary tool of monetary policy. It is the interest rate paid on reserve deposits held by commercial banks at the Bank of England, and it influences the price of credit and creation of deposits throughout the economy. A lower Bank Rate, other things being equal, is intended to stimulate economic activity and raise inflation.

Once Bank rate hit its then-thought minimum level in March 2009,7 the Bank and Treasury developed QE as an alternative tool of monetary stimulus. Under QE, the Bank purchases gilts on the secondary market (i.e. not directly from the Government or other debt-issuer) using newly-created reserve money.8 The reserves are ultimately deposited at the Bank in accounts held by commercial banks. When the gilts purchased by the Bank under QE mature, the Bank purchases more gilts to replace them, thus maintaining the level of QE.

The Bank has grouped the channels through which QE is thought to stimulate economic activity and inflation into three broad categories:

Portfolio rebalancing—QE reduces the quantity of gilts in the private sector and in exchange for money that can be invested in other financial assets. This may boost asset prices and reduce gilt yields.

Market liquidity—By adding a major buyer to the market, QE improves liquidity and reduces interest rates. This may be particularly powerful when there is financial instability.

Signalling—A QE programme may signal to the market that the Bank intends to maintain monetary policy low interest rates for a protracted period. This will tend to reduce interest rates and gilt yields at all maturities.

In all cases, higher asset prices and lower gilt yields and interest rates are expected to stimulate economic activity more widely.

QT is the inverse of QE—the Bank winds down gilts in exchange for reserve money that it removes from circulation. As noted in paragraph 1, this can take a ‘passive’ form of ceasing to replace maturing gilts, or an ‘active’ form of selling gilts in the secondary market. The channels through which QT may or may not weigh on economic activity and inflation are discussed in Chapter 3: of this report. If QE can boost asset prices, reduce gilt yields, improve liquidity and reduce interest rates across maturities, then we seek to understand whether QT reduces asset prices, increases gilt yields, worsen liquidity and increases interest rates across maturities. In Chapter 4, we also want to know what fiscal impact this will have on the Treasury.

Source: Andrew Bailey, Jonathan Bridges, Richard Harrison, Josh Jones and Aakash Mankodi, Bank of England Staff Working Paper No. 899, ‘The central bank balance sheet as a policy tool: past, present and future,’ December 2020 and National Institute for Economic and Social Research, ‘National Institute UK Economic Outlook—Emerging from the Shadow of Covid-19’, Box B The long and uncertain road to exiting Quantitative Easing, Pp 25–28, Summer 2021 Series A No. 3, 2 August 2021

2 The Bank’s strategy for quantitative tightening

7. The Governor of the Bank, Andrew Bailey, told us that QT was being carried out now that monetary policy was tightening in order that the Bank would have space for undertaking more QE or other monetary and financial operations in future:

It is important looking forwards that the Bank’s balance sheet adjusts so that it has headroom to do whatever we might need to do in the future. I think it is important that we do not envisage running in steady state with the balance sheet as big as it is [ … ] It is not because I am envisaging that we do anything of that nature in the near future; it is really about being able to use the balance sheet should we need to.9

8. Sir Dave Ramsden, the Bank’s Deputy Governor for Markets and Banking, explained to us the Bank and MPC’s strategy for QT in the terms of “three principles”:

One [ … ] was that the Bank rate would be the active instrument [of monetary policy]; that would be how we would adjust the degree of tightening. Two, we would go about [QT], whether through not reinvesting assets in the portfolio or active sales, in a gradual and predictable way. And [third] was that we would not disrupt the functioning of markets.10

9. Sir Dave and Ben Broadbent, the Deputy Governor for Monetary Policy, explained that the MPC’s decision to conduct £80 billion of passive and active QT combined from October 2022 to September 2023 “was based on an analysis that was consistent with those principles,” and “chosen as the number that we thought we could reasonably do precisely without having [ … ] liquidity effects on markets or disturbing them unduly”.11 It was explained to us that the MPC’s subsequent decision to conduct £100 billion of passive and active QT from September 2023 to October 2024 reflected the higher number of passively maturing gilts, which the MPC did not think it appropriate to fully offset with slower active gilt sales, as well as the unwinding of the £20 billion Corporate Bond Purchase Scheme having been almost fully completed.12

10. The Governor re-iterated to us that “quantitative tightening is not our active monetary policy instrument” and that “we have sought to minimise the impact of [QT] by the way we do it.” He agreed that it could be framed as a “technical balance sheet exercise.”13

11. The Bank’s long-term strategy for QT and the size of its balance sheet is less established, beyond a principle that the Bank’s balance sheet will be substantially larger than pre-financial crisis levels, since, in the Governor’s words, “there is no question [that there is a] need for banks to hold larger cash reserves, from a prudential point of view and from a financial stability point of view.” In an August 2022 paper, the Bank said that those reserves may be backed on its balance sheet by a different mix of assets from the current stock of medium- and long-term gilts.14

12. In a November 2023 speech, Andrew Hauser, Executive Director for Markets at the Bank, discussed several factors determining the future size of the Bank’s balance sheet. The Bank’s latest survey-based estimate is that banks will require £335–495 billion in reserves, but Mr Hauser regarded that as uncertain and possibly an over-estimate. Instead, alongside active QT the Bank had introduced the Bank’s Short-Term Repo borrowing facility, which “is designed to pick up emerging scarcity in reserves supply at an early stage, replacing reserves drained through QT.” In evidence, Sir Dave assured us that “we have several years to go [until reserves reach the minimum that banks want to hold], so we have time.”15

13. Elsewhere, the European Central Bank expects by Spring 2024 to complete a review of “its operational framework for steering short-term interest rates, which will provide information regarding the endpoint of the balance sheet normalisation process.”16 The Federal Reserve (the Fed) “intends to slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level it judges to be consistent with ample reserves.” In December 2023, Jay Powell, the Chair of the Fed, confirmed this approach but did not indicate where this level lies.17

14. Much of the evidence we have received is broadly supportive of the MPC’s decision to begin QT and its framework for doing so. According to Katharine Neiss, Chief European Economist at PGIM Fixed Income, who has spent much of her career at the Bank, “it was sensible to plan for the possibility that in future [QE] might need to be used again [and] important to replenish the toolkit,” and that the Bank had been “forward-looking” in its communications around QT.18 In written evidence, Martin Weale, Professor of Economics at Kings College London and a former external MPC member, said that “the Bank and the MPC have developed an appropriate strategy.”19

15. Professor Jagjit Chadha, the Director of the National Institute for Economic and Social Research (NIESR), told us that the Bank had been “reasonably clear” about its strategy and that “quantitative normalisation” or “decommissioning” was needed to remove the distortive effects of QE on the public debt:

It is certainly the case that in normal times that quantity of [gilt] holding was too large. It was also incredibly unbalanced, in the sense that we have gone from a debt maturity structure that was on average around 15 years to something that has been shortened because 40% of debt was overnight securities only. That completely distorted the maturity of debt held by the private sector.20

16. While some questioned the Bank’s decision to conduct active QT rather than passive only, as other major central banks are doing including the Fed,21 others pointed out that the Bank held a significant number of long-term gilts and that therefore passive-only QT would be very protracted—QE holdings would still be at £400 billion in 2034—and “lumpy”, since the number of maturities would vary considerably from month to month and year to year.22

17. Some others were more critical, variously calling for faster or slower, or no QT at all. In the faster camp, Andrew Sentance, Senior Adviser at Cambridge Econometrics and a former external member of the MPC, thought that the rate of QT was “modest” and that the Bank could be using it more actively to combat high inflation:

There is a case now for saying we should go a bit faster [ … ] in order to reinforce the impact of interest rates on inflation and the economy. That does not seem to have been fed into the strategy, as far as I can see. [ … ] Quantitative easing is a monetary policy tool, and therefore the reversal of it is also part of monetary policy.23

Professor Chadha thought that the Bank was “entirely sensible to start with a relatively small amount [of QT]” due to uncertainty over its effects, while it could be accelerated in future once more experience had been obtained.24

18. On the case for a slower pace, Gerard Lyons, Chief Economic Strategist at Netwealth, an investment manager, praised the Bank’s technical arrangements for QT, but was concerned that the MPC was over-tightening policy now in response to the outbreak of inflation, having over-loosened with QE during the pandemic. He warned that “the speed and scale of the exit from QE and the rate hikes needs to be very sensitive to moves in the economy.”25 In common with some others calling for a reassessment of the pace of QT, Dr Lyons was also concerned about the Bank’s state of knowledge of what impact QT is having on the economy, an issue we discuss in more depth in the following chapter.26

19. Turning to the longer term, in written evidence Meyrick Chapman, CEO at Hedge Analytics Ltd, and Chris Marsh, Chief Economic Advisor at Exante Data criticised the Bank’s QT strategy for having “no clear discussion of the appropriate size of the Bank’s balance sheet” and “no clear rationale for an optimal size of its assets,” and argued that “continued confidence in the Bank requires it publish its estimates for the future size of the Bank’s balance sheet.” However, NIESR called the Bank’s intention to gauge market reaction as its balance sheet declines a “pragmatic approach.”27

20. There are a variety of views about the desirability of the Bank of England undertaking quantitative tightening (QT), whether it has a good strategic framework for doing so, and whether it is conducting QT at an appropriate pace. Nonetheless, much of the evidence we have received suggests that the Bank’s strategic framework for QT is broadly reasonable. We have also heard that shrinking the Bank’s balance sheet in order to create space for future interventions, should they be needed, and reducing distortions in the gilt market caused by quantitative easing (QE), are potential reasons for going ahead with QT.

21. Since it has some bearing on our later conclusions, we note here that the Bank and Monetary Policy Committee (MPC) have determined: that QT is not being used as an active tool of monetary policy; that they are calibrating QT in order to minimise its economic and financial impacts; and that they are carrying out QT with a view to creating space for future balance sheet expansion, such as quantitative easing (QE), should it be needed. We also note that we have received some concern that the Bank needs a good understanding of the economic and financial impacts of QT in order to calibrate its strategy.

22. One area in which the Bank’s strategy is less well established regards the long-term steady-state size and composition of its balance sheet, which may have a bearing on the longer-term conduct of QT and which, as we note later, may have implications for fiscal as well as monetary and financial stability policy.

23. The Bank should develop its planning on this long-term steady-state size and composition of its balance sheet, and how this relates to QT, in more detail and give regular public updates on the likely future size and composition of its balance sheet.

3 The macroeconomic and financial impact of quantitative tightening

Impacts on growth and inflation

24. The Bank has been candid that the likely macroeconomic impacts of QT are not well understood. In its August 2021 strategy ahead of the start of passive QT, it explained that “the MPC has greater certainty around how changes in Bank Rate affect the economy compared with its other policy tools [such as QE/QT].” Nonetheless, it judged that the impact of QT, “when conducted in a gradual and predictable manner”, is likely to be less than that of QE. This was because:

i) increases in QE provided a signal that the MPC intended to loosen monetary policy on a sustained basis, whereas QT would not “signal a need for a higher path for Bank Rate”, and

ii) increases in QE had sometimes taken place during periods of financial stress, when its “effects tend to be more powerful.”28

25. As we have previously noted (paragraphs 8 to 10), Bank officials have explained to us that two of the “key principles” of the Bank’s strategy for QT have been to use changes in Bank Rate as the active monetary policy tool and to conduct sales and maturities of gilts under QT gradually and predictably, thus aiming to create the very conditions that the Bank thinks will mean that QT has a smaller impact that QE.29

26. As well as being uncertain about the effects of QT, the Bank has not attempted to model it as part of its economic forecasts. Ben Broadbent, the Bank’s Deputy Governor for Monetary Policy, explained to us in November 2022 that the Bank instead assumes that the effects of QT are included in the forecast via market asset prices:

There is no fixed multiplier and it would be misleading to provide one for that reason. It is not the case that a given number of pounds of purchases or sales of gilts from the APF does X to growth or inflation. [ … ] It is in the forecast via the yield curves and prices of other financial assets on which we condition the forecast. That is the way that we tend to see it.30

Dr Broadbent has also told us that this implies that it is also difficult to determine the impact of QT retrospectively: “By design, almost—by construction, certainly—we can’t tell exactly what it is doing precisely because we have already announced it.”31

27. In August 2023, the Bank published the results of its first annual review of QT, admitting that “the impact remains difficult to measure precisely, and the MPC will continue to learn as the process progresses.” Nonetheless, “a range of empirical evidence [ … ] suggests [QT] is having some tightening effect on [gilt] yields, but that this is small,” and therefore “the impact on activity and inflation is also likely to have been small”:

Models point to an overall increase in the term premium [on gilts] of around 40 basis points on the 10-year gilt yield since the Committee voted to begin QT, accounting for only a very small proportion of the overall rise in gilt yields. QT may be one factor contributing to that increase, but [ … ] analytical approaches that attempt to isolate the impact of QT specifically suggest that this is likely to account for only part of the 40 basis point increase, in the region of 10–15 basis points.32

Dr Broadbent has told us that a shift in basis points of this magnitude would be associated with an impact of “less than 0.1 percentage point on inflation.”33

28. Subsequent to the publication of this August 2023 analysis, at its November 2023 meeting the MPC noted that term premia on gilts had increased, which “might have reflected [ … ] an evolving assessment of the balance of supply and demand in government bond markets.” But the Governor subsequently told us that “we have not really updated or changed our view” on the impact of QT on term premia.34

29. Katharine Neiss, Chief European Economist at PGIM Fixed Income, echoed the Bank’s uncertainty over the economic impact of QT and reluctance to estimate its impacts:

The bottom line is that we really do not know what the impact is going to be. [ … ] My view is that it is important not to let that uncertainty paralyse one from acting but to build it into the framework. Central banks have done this by signalling well in advance their plans [ … ] but also to build in a degree of flexibility for unforeseen events.

Dr Neiss gave us a rough estimate that QT “is contributing probably 10 or 20 basis points” to monetary tightening, in terms of an equivalent move in Bank Rate.35 The only other attempt to quantify QT’s impact that we received was from Handelsbanken in written evidence, whose figure was 50 basis points on Bank Rate by mid-2025.36

30. Professor Jagjit Chadha, the Director of the National Institute for Economic and Social Research (NIESR), agreed with Dr Neiss’s points and endorsed the Bank’s arguments that QT would have a smaller impact than QE.37 In written evidence, Martin Weale, Professor of Economics at Kings College London and a former MPC member, said that “it [is] not possible to say with any precision what the impact of [QT] will be” but agreed that it would be smaller than that of QE.38

31. Some others were more critical. Gerard Lyons, Chief Economic Strategist at Netwealth, was concerned that the Bank is “flying blind”, and thought in particular that money supply ought to be part of the assessment:

I am not convinced that the Bank’s assessment process for how QT will be impacting the economy is clear to everyone. That is why [ … ] it is seen as start-stop.

[ … ]

It seems that the Bank does not really have a clear view in terms of how QT will impact the economy. [ … ] You need to have monetary growth on your dashboard. The Bank [ … ] does not have a clear view about bank lending or indeed wider monetary growth. That is why monetarists here in the UK tend to regard QT as the Bank flying blind. [ … ] It is untried and untested. Therefore, one cannot be convinced that it will just be the mirror image of the QE process itself.39

32. We have heard other criticisms of the Bank’s forecasting performance over the pandemic and the outbreak of inflation thereafter for not taking sufficient account of money supply, such as from Stephen King, Senior Economic Advisor at HSBC:

There was incredibly powerful money supply growth in 2020. You might say that the relationship between money and the economy is not as strong as it once was. I absolutely agree with that, but when you have that kind of strength coming through, which was really off the scale of what we had seen previously, that strikes me as being a red flag. It is an indicator that perhaps the model, as it was, was not working as reliably as the Bank had suggested.40

33. Sushil Wadhwani CBE, Senior Adviser at PGIM Wadhwani and an external member of the Monetary Policy Committee from 1998 to 2001, agreed that “the most obvious cross-check in the last quarter of 2020 was what was happening to the money supply [ … ] the forecasts the Bank was then producing were not consistent with the money supply growth.” However, Dr Wadhwani acknowledged that there were periods were the relationship between inflation and money supply “completely broke down.”41

34. Money supply was not discussed in the Bank’s quarterly Monetary Policy Report through 2020 to August 2022. In the latest November 2023 report, trends in money supply are addressed in one paragraph.42 When challenged on this, the Governor told us that “we spend a lot of time looking at what I would call the evidence that underpins [money supply] numbers [including] money and credit conditions.” On another recent occasion, he told us that “of course, money is important [but] as a short-run predictor, money is not as good”.43

35. Meanwhile, others were concerned that a lack of detailed knowledge of the impacts of QT may inhibit the effective setting of monetary policy. In written evidence, Meyrick Chapman, CEO at Hedge Analytics Ltd, and Chris Marsh, Chief Economic Advisor at Exante Data, said that the Bank’s assessment that QT would have a smaller impact than QE as it will not take place during financial stress was “curious and risky.” They argued in particular that QT could affect the transmission of Bank Rate rises to retail deposit rates or the build-up of money supply that occurred over the pandemic, but that the Bank had not researched these issues.44 Despite his view that the impact of QT could not be known with precision, Professor Weale also suggested that without such estimates “it is hard to see on what basis [the Bank] would set Bank Rate.”45

36. When we put it to the Governor that QT is “to a certain extent a leap into the dark” and “slightly unknown territory”, he said “yes [ … ] that is why [ … ] we keep QT under constant review.”46

37. QT is a comparatively untested monetary policy tool, and it is understandable that the Bank would find it challenging to model its effects as part of its forecast. We have seen supporting evidence for the Bank’s contention that it is having and will have a small impact on the economy. That said, we are concerned that the Bank is taking a ‘leap in the dark’ by embarking upon a major monetary operation without specifically and separately tracking its effects. As we noted above, there is a spread of views about the appropriate pace of and risks around QT, including a risk that QT is tightening monetary conditions by more than the Bank thinks. The MPC’s ability to set the appropriate course of monetary policy could be improved if it has as full as possible an understanding of QT’s effects either at the pre-announced pace or in alternative scenarios.

38. The Bank should develop its forecasting and modelling tools for understanding the impact of QT and look to how these can be integrated into the forecasting and communication process. Given the uncertainty over its effects, the Bank should also update Parliament and the public on QT at each quarterly Monetary Policy Report, rather than at an annual review only. At these reviews, it could examine the impact of QT on the money supply and the consequences for growth and inflation.

Impacts on financial stability

39. The Office for Budget Responsibility (OBR) stated in its November 2023 Economic and Fiscal Outlook that the “private sector needs to absorb historically high volumes of [public] debt over the coming years,” a significant part of which is accounted for by passive and active QT. The OBR forecasts that the net change in private sector holdings of public debt will be on average “the highest sustained level this century” at 6.4 per cent of GDP over 2023–24 to 2028–29, with the peak of 7.9 per cent of GDP in 2024–25 being the highest on record. Active QT is forecast to contribute 2.9 per cent of GDP on average to this, and 3.4 per cent in 2024–25.47 This will come in a year in which, according to the Debt Management Office’s latest illustrative projection, it will have a gross financing requirement of £277 billion, comprising a £137 billion Central Government Net Cash Requirement and £140 billion in gilt redemptions.48

40. Other financial markets and services can expect to be affected by QT—the Bank’s December 2023 Financial Stability Report notes that QT “is likely [ … ] to put downward pressure on the overall level of bank deposits in the system relative to the stock of lending”.49

41. As noted above, at its first annual review of QT, the Bank judged that it was having a modest impact on gilt yields (paragraphs 27–28). The review also found that “the impact of QT on financial markets, while difficult to measure precisely, is judged to have been small, and there is no evidence of a negative impact of gilt sales on market functioning across a range of financial market measures.”50 Sir Dave Ramsden, the Bank’s Deputy Governor for Markets and Banking, argued in a speech in July 2023 that gilt market liquidity indicators had been no worse on days where there were QT gilt sales and that bid-to-cover ratios showed that the sales had been well absorbed by the market.51

42. We asked for evidence whether QT might have an impact on financial stability risks, including in the gilt market. Gerard Lyons praised the operational design of the QT auctions but warned that “the global [and] domestic context, in terms of absorbing the exit from QE via QT is difficult in terms of market management [ … ] I certainly would be thinking twice about the QT process, given the scale of bond issuance already hitting the market.” But Jagjit Chadha thought that the Bank had the tools to resolve any liquidity problem, should one arise, while Katherine Neiss told us that “as far as the market is concerned, it has thus far been a bit of a non-event.”52

43. In written evidence, there was generally a view that QT should not entail unacceptable financial stability risks if it is conducted at a slower pace than was QE. James Steeley, Professor of Finance and Head of the Department of Economics and Finance at Brunel University London, thought that QT would benefit financial stability by reducing the cases where the Bank owns especially high proportions of particular outstanding gilts.53

44. The MPC’s initial vote to launch active QT was published on 22 September 2022, just prior to the announcement of a ‘mini-budget’ on 23 September, an exceptionally sharp rise in gilt yields on that day and the following few working days, and the outbreak of the financial crisis related to the liability-driven investment (LDI) strategies of defined-benefit pension funds.54 On 28 September, the Bank postponed the launch of active QT and launched an intervention that saw it purchase £19.3 billion of gilts. The Bank distinguished these purchases from QE since they were to be held temporarily, but they were housed in the APF alongside the QE gilts. Active QT began on 1 November 2023, while the gilt purchases associated with the LDI crisis were fully unwound by January 2022.55

45. We did not receive substantial evidence that QT had been a causal factor in the outbreak of the LDI crisis,56 while Dr Neiss thought it was a successful case of the Bank’s strategy being “tested in terms of unanticipated events.”57 However, in written evidence NIESR thought that there were lessons to be learned for QT:

It might be better to tie QT sales explicitly to market sentiment or to risk premia estimates, for instance, to allow flexibility under exceptional circumstances like those of September. It might be helpful for a regular report from the Debt Management Office on market participant demand or sentiment to be produced.58

46. In written evidence, William Allen, a historian of the Bank and a Visitor at NIESR, expressed concern that “QT increases the burden on the market makers and makes the market less liquid,” referencing the LDI crisis and 2020 ‘dash for cash’:

In March 2020, the capacity of market makers was overwhelmed by a surge of offerings of government bonds by investors wishing to sell. Much the same thing happened after the fiscal event of September 2022. In the next several years, with the coincidence of prospectively large government borrowing needs, large amounts of gilts maturing, and the implementation of QT, similar episodes are very likely to occur.

[ … ]

The Bank of England is likely to need to act as a last-resort market maker again, and it would be highly desirable to have a contingency plan. [The fact that Bank staff] had to work overnight on 27th September 2022 to formulate a plan suggests that no contingency plan was ready then.59

47. The Bank is already looking to expand its financial stability toolkit in response to the LDI crisis and the March 2020 ‘dash for cash’. In September 2023 Andrew Hauser, the Bank’s outgoing Executive Director for Markets, gave a speech discussing options to “build a new central bank backstop tool capable of lending directly to NBFIs [non-bank financial institutions].” One objective of the proposed tool is to reduce the Bank’s need to resort to large-scale gilt purchases.60

48. The Governor told us that the pause of QT during the LDI crisis had been consistent with the Bank’s already-announced strategy and that markets had approved. More broadly, he said that QT had not been associated with any instability in the banking system. Moreover, he was of the view that QT had been beneficial for financial stability by increasing the supply of collateral in secured markets and repo markets, and by increasing liquidity in gilt markets.61 Ben Broadbent pointed out that QT is a much smaller contributor to gilt sales to the private sector than the Government, and he assured us that the £80 billion pace of QT in the first year “was chosen as the number that we thought we could reasonably do precisely without having these kinds of liquidity effects on markets or disturbing them unduly.”62

49. 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.

50. 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.

51. Given the unusually high extent of gilt sales in the coming years, the Bank and the Debt Management Office should publish more frequent updates on gilt market participant demand and sentiment.

4 The fiscal impact of quantitative easing and tightening

52. Quantitative easing and tightening have had a significant fiscal impact, since the Government is ultimately accountable for all profits and losses incurred as the sole owner of the Bank of England. Since 2012, any profits/losses arising from QE have been remitted to/compensated by the Treasury on a quarterly basis. For most of the history of QE this has been profitable for the Treasury, but from 2022 the Bank began incurring losses.

53. These fiscal impacts are not solely a consequence of quantitative tightening—the Bank would have begun incurring losses without it. However, given that the losses have coincided with the beginning of QT (both being triggered by a higher Bank Rate) and that the pace and scale of QT do affect fiscal impacts, we have examined those fiscal impacts as part of this inquiry.

Why QE and QT have a fiscal impact

54. The Treasury indemnity for QE was established in 2009 alongside the Asset Purchase Facility (APF), the legal vehicle that buys and holds QE gilts.63 The Treasury indemnity did not come with any requirements to minimise costs or maximise profits.64 Instead, as set out in the March 2009 letter from the Chancellor first authorising QE, the MPC was to “continue to maintain price stability and subject to that, support the Government’s economic policy, including its objectives for growth and employment.”65 As put to us in written evidence by William Allen, a historian of the Bank and a Visitor at the National Institute for Economic and Social Research (NIESR), this meant that “the objective of debt management policy, namely to minimise financing costs over the long term, taking account of risk, was subordinated to the objectives of monetary policy.”66

55. Sir Dave Ramsden, the Bank’s Deputy Governor for Markets and Banking, told us that the indemnity had been critically important for the successful conduct of monetary policy:

The Bank has to be indemnified, to use the terminology, in order that it can go ahead with meeting its monetary policy objective. [ … ] the MPC cannot be at risk of the Bank becoming insolvent if its capital was wiped out by losses on those asset holdings, hence the indemnity.67

He also confirmed that, while the Bank is working with the Treasury on ensuring value-for-money around QT operations and gilt auctions,68 MPC decisions about the scale, pace and composition of QT were not and will not be affected by value-for-money considerations:

The forecast of the cash flows—it is a really important institutional point here—is not a consideration for the MPC, and it should not be. [ … ] The MPC is aware of the cash flow consequences, but the MPC is thinking about its objective, which is for monetary stability for hitting the inflation target.69

James Bowler CB, the Permanent Secretary of the Treasury, confirmed to us that the Treasury shares this view.70

56. The sources of profits and losses from QE have been explained by Office for Budget Responsibility officials.71 In summary, there are two sources:

  • The Bank earns interest from the Treasury on the gilts it owns, and it pays out interest at Bank Rate on the reserve deposits it created to buy those gilts. The reserve deposits are held by commercial banks. This proved profitable over 2009 to 2022 when the Bank Rate had been near zero, as the interest earned on gilts was greater than that being paid out on reserves. As the MPC tightened monetary policy and raised Bank Rate, the situation reversed. This loss to the Bank is now covered by the Treasury indemnity in quarterly payments.
  • The market value of gilts held by the Bank falls when interest rates rise and vice versa. Higher interest rates are now reducing the market value of gilts, and most gilt sales and maturities lock in losses.

Figure 1: Value of the Bank’s holding of gilts purchased under QE at initial purchase price and prevailing market value

Line graph showing the value of the Bank’s holdings of gilts purchased at initial price under QE rising from zero to a peak of £875 billion over four phases from 2009 to early 2022 inclusive; it then began falling, reaching £744 billion at the end of 2023. Under prevailing market value, they fell more steeply to £559 billion.

Source: Initial purchase price—Bank of England database, YWWB9T9. At prevailing market value—Bank of England Asset Purchase Facility Fund Limited Annual Reports editions from 2009–10 to 2022–23; and Bank of England, Letter from the Governor of the Bank of England to the Chair of the Treasury Committee re Cashflows arising from quantitative easing and tightening, 18 December 2023. Prevailing market value figures are shown at end-February from 2009 to 2023, and at 12 December 2023.

57. As summarised to us by Mr Allen, “The effective shortening of the maturity structure of government debt greatly increased the Treasury’s exposure to fluctuations in short-term interest rates and aggravated risks to the sustainability of the public finances at a time of rising interest rates.” On the subject of democratic accountability, he added:

The control of public spending depends on the Treasury, which is directly answerable to Parliament [ … ]. Asset purchases by the Bank of England are, in a sense, public spending decisions, because the public finances ultimately bear the risks that they carry, but not being subject to Treasury authorisation in the same way, they are an exception to the general rule. The exception is tolerable if the Bank’s balance sheet is small, but it becomes increasingly less so as the Bank’s balance sheet grows.72

58. Initially, any revenues from gilt coupon payments accumulated on the APF balance sheet. In 2012, when it had become clear that the scale and duration of QE was far in excess of that originally envisaged (the Treasury initially indemnified £100 billion of gilt purchases in 2009, rising to £375 billion by 2012, and a peak of £875 billion in 2021), these arrangements were changed so that any profits or losses would be remitted to or from the Treasury on a quarterly basis. It was recognised in the relevant exchange of letters between the then-Chancellor and then-Governor of the Bank that the flow of profits being remitted to the Treasury would be likely to reverse in future.73 Compared to an alternative scenario in which the profits had remained in the APF and been used to cover any losses, the quarterly remittances since 2012 have had the effect of boosting the public finances initially, but ultimately bringing forward the point at which the Bank would need to call on the Treasury indemnity and increasing the eventual size of that call.

59. In written correspondence, the Treasury Permanent Secretary, assured us that “cashflows from the APF to HM Treasury were always expected to reverse as QE is unwound and gilts are sold back to the market,” citing the 2012 exchange of letters.74 However, prior to the 2012 cashflow decision, and to judge by the contemporary evidence gathered by our predecessor Committees, there was some confusion about the profits and losses arising in QE. In 2010 and 2011, Lord King of Lothbury, the then Governor of the Bank, told the Committee on a number of occasions in oral and written evidence that “profit or loss arising from movements in the market price of gilts held by the APF would be offset by a loss or profit for the Government as issuer of the gilts,” that the “combined effect [on the Bank and Treasury’s balance sheets] wipe each other out,” and that “mark to market for the public sector as a whole, it’s a wash.”75

60. More broadly, limited thought appears to have been given to the exit strategy from QE when it was first launched. We were told in 2013 by Dame Kate Barker, who had been an external member of the MPC from 2001 to 2010, that unwinding QE “was not at the top of our minds” in 2009 amid the financial crisis.76 In written evidence to this inquiry, Professors David Blanchflower and Richard Murphy, the former an MPC member from 2006 to 2009, told us that in internal discussions in 2009 the Bank “was entirely unclear on how QE should end,” “when QE should end,” or “what the impacts would be if and when QT was required.”77

61. In 2013, after the decision to remit quarterly cashflows to the Treasury and the associated acknowledgement that those cashflows would probably reverse, our predecessor Committee was nonetheless told by Paul Fisher, then the Executive Director for Markets at the Bank, that: “our central expectation is at [that] we are more likely than not to end up with a positive position overall”; “it is just a cash management issue”; “it is possible that [ … ] we could have a negative position” but that would be an “extreme view”; and “the longer time goes by before we unwind the more likely it is we end up with a profit at the end rather than a loss.”78 Research commissioned by our predecessor Committee in 2012 also found that a lifetime loss was “unlikely.”79

62. More recently, Sir Dave Ramsden told us that the current losses from QE and QT should be put in the context of the initial profits.80 Nonetheless, while forecasts of the likely net cashflow to arise from QE and QT are uncertain and highly sensitive to assumptions about interest rates and the pace of QT, the Bank’s latest projections do point to an overall lifetime loss. Annual losses in each of 2023 and 2024 will amount to £40 billion, eroding the cumulative £124 billion positive cashflow that was generated up until September 2022. Subsequent further losses bring the current “highly uncertain” estimate of the total cumulative lifetime net present value of QE cashflows to between -£50 billion and -£130 billion.81

63. Notably, according to Michael Saunders, an external member of the MPC from 2016 to 2022, the losses that the Bank will incur on its QE and QT programme are likely to be significantly larger than those incurred by the European Central Bank and the US Federal Reserve due to the longer maturity of the Bank’s public debt holdings.82

64. Notwithstanding the need to ensure that the programmes are compatible with the operational independence of monetary policy, it strikes us as highly anomalous that decisions have been and are being taken about QE and QT concerning huge sums of public money without any regard to the usual value-for-money requirements. This may have been more easily tolerable had QE remained at the relatively modest scale originally envisaged, or had a lifetime loss remained an unlikely scenario rather than the central projection. As it is, with the benefit of hindsight there is no reason to think that the indemnity and cashflow arrangements devised in 2009 and 2012 are the most suitable available.

65. We recognise that QE and QT are processes already well in train, and it may not be possible to make large changes to the arrangements made in 2009 and 2012 without impacts on the credibility of the UK macroeconomic framework. However, as we have noted, the Bank is undertaking QT in part to create space should it need to undertake QE or another form of balance sheet expansion in future. Given what we now know, any future QE should not proceed automatically under the existing arrangements. Instead, the arrangements should be revisited in the light of the implications for value-for-money, public spending and Bank independence that we outline below.

Are QT and QE value for money?

QT and value for money

66. Written evidence from NIESR explained that there is a trade-off between monetary policy decisions on QT and the fiscal impact:

There is a tension between the costs of execution which are likely to be lower if QT is conducted on the quiet (i.e. by simply waiting for the existing stock of bonds held to mature) and the risks involved in holding such an unbalanced portfolio for a long time. [ … ] Selling the bonds back to the non-bank financial sector more quickly reduces the riskiness of that portfolio but is more likely to depress bond prices and so increase losses.83

67. The point that there is a trade-off between the pace of QT and its fiscal impact is substantiated in a series of projections of the cashflows arising from QE and QT under different scenarios for the pace of QT with which the Governor has provided us in correspondence (see chart below). While acknowledging once again that these projections are highly sensitive to assumptions about future interest rates, we note that:

  • Slowing the pace of QT from £100 billion a year to £80 billion a year slows the rate of annual losses while having little impact on the lifetime net present value of losses.
  • A passive QT-only strategy (i.e. not replacing maturing gilts but not selling any gilts) substantially slows the rate of annual losses, and although the nominal lifetime loss is larger, the net present value is smaller since future losses are discounted. The Governor notes that the relatively small difference in the net present value “illustrates the point that, while they may shift cashflows over time, different unwind strategies do not necessarily change the lifetime profit or loss accumulated.”
  • Maintaining the QE gilt portfolio at its present level (i.e. neither passive nor active QT) also slows the losses and even sees them reverse in the very long term, with a significantly lower lifetime net present value of loss. The Governor explains that this arises because “additional bonds may be bought below par so that gains are realised at maturity, which gradually translates into a positive effect on the overall cashflows.”84

Figure 2: Cumulative APF cashflows, actual and projected [diamonds represent the discounted net present value of lifetime cumulative cashflows out of the APF]

Line graph showing that APF cashflows rose continuously from 2013 and into 2022, peaking at between £100 billion and £150 billion, and subsequently fell back to between £50 billion and £100 billion by December 2023. It shows projected scenarios ranging from major unwind, which would give  net present value about negative £100 billion,  to maintaining portfolio which would give a net present value between zero and negative £50 billion.

Source: Bank of England, Letter from the Governor of the Bank of England to the Chair of the Treasury Committee re Cashflows arising from quantitative easing and tightening, 18 December 2023

68. Nonetheless, we saw some scepticism that the Bank could or should be taking value-for-money into account in monetary policy decisions. Andrew Sentance, Senior Adviser at Cambridge Econometrics and a former external member of the MPC, warned against this:

We have to be very careful about putting too many objectives on the Bank of England. Its general remit is to keep price stability. [ … ] I am not sure that starting to add fiscal objectives of keeping down the cost of some operation is going to help very much. It is going to muddy the waters when it comes to assessing the right monetary policy.85

In this context, we note our earlier discussion (paragraphs 8–10 and 20) about how the Bank does not use QT as an active instrument of monetary policy and that the Governor agreed that it could be characterised as a “technical balance sheet exercise.”86

69. 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 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. That being so, while it is right that MPC members should have monetary policy and the inflation target foremost in their thinking and decision-making, the Bank and Treasury should explore how criteria on value for money and the spending power of the Treasury could be included in decisions about the ongoing pace and timing of QT.

QE and value for money

70. We received evidence that the value of QE should be assessed against its macroeconomic impact (for example on growth, inflation and employment) rather than its direct financial costs. Jagjit Chadha, the Director of NIESR, told us that “while it is absolutely right that we need to keep a careful track of the actual fiscal costs of these measures, what must be set aside on the other side of the balance sheet is the extent to which it helped stabilise an economy that [ … ] was teetering on the edge after the collapse of Lehman Brothers in 2008.”87 Katharine Neiss, Chief European Economist at PGIM Fixed Income, argued that this meant that the overall fiscal impact was likely highly positive:

We should judge QE on what it was intended to do, which was to support the economy and keep inflation at target. [ … ] We need to think about the impact of the fiscal, again more widely. If QE supported the real economy, which I think the body of evidence shows, that too would have been beneficial for the Government. It means that people were in work, paying taxes. [ … ] It also lowered interest rates, which of course lowered the interest on Government debt.88

The Governor and the Treasury Permanent Secretary made similar points in oral evidence and written correspondence.89

71. However, some witnesses were more doubtful that the latter rounds of QE had been as effective in stimulating the economy and therefore justifying the fiscal cost. Dr Gerard Lyons, Chief Economic Strategist at Netwealth, said that the “first phase of QE was good for the economy,” the second had been “unnecessary”, and the third [during the pandemic] “bad”, and that therefore the fiscal cost had “become significant.” Dr Sentance was only sure that “the earlier QE” had justified the cost, although he warned that “we should not be too preoccupied with these fiscal costs.”90 Professor Chadha thought that QE could be used more selectively in future:

There are some questions as to whether we were too quick to turn to QE both after the result of the Brexit referendum and in the middle of Covid. It has become clear that we do not have to buy bonds and hold them forever. We can have short-term liquidity operations. [ … ] If there is a large enough shock, such that we hit the zero lower bound, that is the time we want to reignite QE. At that time, we need to be careful not to overdo it and return to just using it in moments of stress, and look to get out of it more quickly.91

72. This may chime with some communications from Bank officials that describe the effects of QE as being ‘state contingent’ in their effect on the economy, in that they are more powerful when financial markets are illiquid. In an April 2023 speech, Ben Broadbent showed that QE announcements outside of March 2020 and February-March 2009 had had a relatively limited effect on gilt yields.92 In a speech in the same month, then-MPC member Silvana Tenreyro said that “when used in calm market conditions, QE effects on longer-term interest rates are likely to be more limited,” and that she voted for further QE in the second half of 2020 as “ insurance in case of further market dysfunction, not to actively lower yields.”93

73. Notwithstanding the operational independence of monetary policy, Chancellors have also taken a role in expansions of QE, since each increase in the size of the indemnity that backs the programme has been authorised by the Chancellor of the day. The Chancellor has also given six-monthly authorisations to decreases in the size of the APF as QT has progressed. However, the current Chancellor described his role as limited:

I have to indemnify the Bank to make that possible, but QT is a tool that is exercised independently as part of its array of tools on monetary policy. It is therefore not appropriate for me to comment on that, just as I would not comment on whether it is right or wrong to raise or lower interest rates.94

74. In correspondence, the Treasury Permanent Secretary told us that the Treasury scrutinised each expansion of QE and the APF against value-for-money considerations:

The APF is indemnified by HM Treasury and, given this contingent liability, any change in the size or composition of the APF requires authorisation by the Chancellor. Each decision to increase the maximum authorized size of the APF is accompanied by an assessment of the macro-economic and fiscal impacts, and an assessment against the framework for Managing Public Money. The level of assessment and scrutiny has been consistent throughout HM Treasury’s indemnification of the APF.

However, Mr Bowler confirmed that “decisions on QE are taken by the independent [MPC] to meet its monetary policy objectives.”95

75. It is right to say that the overall effectiveness and value-for-money of QE and QT should be judged by their wider macroeconomic impacts on inflation, growth, and employment, rather than on the direct fiscal costs alone. There is agreement among many that certain rounds of QE, especially the initial rounds, were effective and easily justify the later fiscal cost. However, there is a spread of views about the relative economic impact of later rounds of QE, including, it seems, among Bank officials. In its response to this report, the Bank should set out whether it thinks that all individual rounds of QE have proved to be good value for money considering the later fiscal cost. In any future QE, lessons should be learned about the effectiveness of each round of QE over 2009 to 2021 and how it might be used more selectively, partly with reference to the fiscal implications.

76. The Chancellor’s role in approving changes in the size or composition of the APF that houses the QE and QT programme remains unclear to us, since on one hand the Chancellor insists that decisions over QE and QT are taken independently by the MPC and cannot be commented upon, while on the other hand the Chancellor’s authorisation is “accompanied by assessment of the macro-economic and fiscal impacts.” The Treasury should clarify whether the Chancellor’s authorisation of changes to the APF involves a substantial decision or is only a formal endorsement of the MPC’s decision, and explain the extent of the assessment of macro-economic and fiscal impacts that accompanies each authorisation. In particular, the Treasury should confirm whether or not there was a threshold at which the indemnity would not be provided.

Can the losses be reduced?

77. We took evidence that it may be possible to reduce the ongoing fiscal costs of QE, with a greater burden instead falling on the commercial financial sector. One approach may be for the Bank to stop paying interest at Bank Rate to commercial banks holding central bank reserves. However, there is concern that this could undermine the transmission of monetary policy to the wider economy or entail financial stability risks were banks to try to avoid holding reserves.96

78. In its written evidence, the New Economics Foundation described a more intricate scheme whereby the bulk of reserves would no longer receive interest up to a regulatory minimum reserve requirement, while excess reserves would be paid Bank Rate, in order to preserve the transmission of monetary policy. However, NIESR argued that any system of mandated reserves, while possible, could generate volatility in money markets and would not be preferable on financial stability grounds. Martin Weale, Professor of Economics at Kings College London and a former MPC member, also in written evidence, thought that “ if the aim is to tax banks more, then it should probably be done in a way which is not linked to their holdings of reserves.”97 The Governor told us that the Bank was not allowed to use the Bank of England Levy it imposes on the financial sector to recoup losses from QE and QT.98

79. More broadly, witnesses were concerned about any attempt to reduce the fiscal costs while QT is ongoing, but thought the question may need to be revisited once the Bank’s balance sheet had reached its future steady state (see paragraphs 11, 19 and 22). Professor Chadha thought that a change now would be “approaching a default”:

I see the QE process as having told the banks that they would be paid bank rate on reserves until QE has been decommissioned.[ … ] [If the Bank is to change the remuneration of reserves] I would rather do it when we have got to the appropriate level of reserves, once we decommission QE, not in the middle of a decommissioning exercise. I think that would be seen as some form of something approaching a default.99

Similarly, Dr Neiss warned against “changing the framework, on the basis of something that [had been] well-anticipated”, Dr Sentance argued that it is not “good for credibility if we change the rules halfway through the process,” while Dr Lyons thought “either stick as you are or you have a tiered system.”100

80. In correspondence, we asked the Governor and the Treasury’s Permanent Secretary for further information on what would happen when reserves reached their future steady-state, at which point Professor Chadha suggests that the remuneration of reserves could be reconsidered. The Permanent Secretary deferred to the Governor, who told us that the MPC could decide to continue “the gradual and predictable approach [to QT] that it has previously articulated,” while replacing the gilts with other assets to order to maintain the level of reserves:

The appropriate long-term mix of assets to back that level of reserve supply requires careful consideration of its implications for our policy objectives. Decisions on the asset mix in steady state will be made by the Bank in due course in close consultation with relevant stakeholders, including HMT [ … ].

Since the steady state level of reserves is not directly connected with the progression of QT, the best guide to potential cashflows associated with the APF can be found in APF Quarterly Report.101

81. We have received proposals for interventions that would cut the remuneration of bank reserves and thereby reduce the ongoing losses arising from QE and QT. However, we have also received evidence that cutting remuneration now could be similar to a default, and that any scheme tied to commercial banks’ holdings of reserves could undermine financial stability. Overall, we do not support cutting the renumeration of Bank reserves. We believe taxes on banks should be set through Parliament in a Finance Bill.

82. Some witnesses thought that the remuneration of reserves would need to be reconsidered once reserves had reached their future steady-state level. However, there is a lack of information about future arrangements for the Bank’s balance sheet once the steady-state level of reserves is reached.

83. The Bank and Treasury should clarify the future arrangements for the steady-state level of reserves on the Bank’s balance sheet as soon as possible, including the future of QT at that point, the assets that will be used to back reserves, the remuneration of those reserves, and the implications for the Bank’s profits and losses and the Treasury indemnity.

Bank independence and impact of QE and QT on public spending

84. The quarterly indemnity payments paid by the Treasury to cover losses generated by QE and QT contribute towards measures of public borrowing and debt, and thereby towards the OBR’s assessment of whether the Government is meeting its fiscal rules. The Chair of the OBR, Richard Hughes, confirmed to the Commons Public Accounts Committee that “the losses on the APF also affect whatever objective the Government has to get debt under control, because these are all transactions that, in the end, affect debt.”102 According to the OBR’s forecast to accompany the November 2023 Autumn Statement, in 2028–29—the year in which the fiscal mandate requires public sector net debt as a percentage of GDP excluding the Bank of England to fall—QE and QT losses add £28 billion to the debt. Other things being equal, these losses reduce headroom against the target from £41 billion to £13 billion.103 While Bank officials have told us that QE and QT losses should be set against earlier profits and varying the pace of QT will make a limited difference to lifetime losses (see paragraph 62), the fact that the fiscal rules are assessed over a five-year time horizon and are binding in a single year means that it is the annual losses that affect decisions about public spending and borrowing.

85. Torsten Bell, Chief Executive of the Resolution Foundation, and Paul Johnson, Director of the Institute for Fiscal Studies, set out the consequences of the indemnified losses on QT for public spending:

[Torsten Bell] We are running a tighter fiscal policy because of that [ … ] because the measure of debt we have chosen and the year which we have chosen it. It is directly feeding into the level of the fiscal policy.

[Paul Johnson] It is a real thing. It is real money that is going to be spent on that, that could otherwise have been spent on other things. [ … ] For the public finances, over this period, it is really bad news.104

86. We asked for evidence on whether the interaction of QE and QT losses, the Treasury indemnity on them, and the fiscal rules potentially undermine the independence of monetary policy, or at least its perceived independence. Professor Chadha told us:

I have been concerned about the losses on the APF for a number of years, concerned more than anything because I was worried for a long time that it might seem to be undermining central bank independence. There was a concern at the back of my mind that, “If the central bank is seen to be making losses, will that in any way affect its decision-making?”105

We have received numerous reassurances from the Bank and Treasury that decisions on QT and monetary policy are being taken independently by the MPC.106

87. Central banks around the world are accounting for the cashflows arising from their QE and QT programmes in a variety of ways, in many cases having a less direct and immediate impact on fiscal policy. Notably, the US Federal Reserve (the Fed) is accumulating a ‘deferred asset’ on the asset side of its balance sheet that exactly offsets the cumulative loss on the liabilities side of its balance sheet. The ‘deferred asset’ will be realised out of future profits (for example from seigniorage) before the Fed resumes remittances to the US Treasury.107 Like the Bank of England, the Bank of Canada has a government indemnity for its losses, but similarly to the Fed, it holds this indemnity as a ‘derivative asset’ on its balance sheet, to be realised out of future profits, rather than realising the losses immediately.108

88. In written evidence, Meyrick Chapman, CEO at Hedge Analytics Ltd, and Chris Marsh, Chief Economic Advisor at Exante Data, argued that “the Government and Bank should investigate if the indemnity can be accomplished by a derivative book entry on both sides [ … ] or by the deferred asset approach employed by the Federal Reserve.”109 Dr Neiss told us that these approaches could benefit independence:

From the Government consolidated budget perspective, they are essentially equivalent. The difference is in the flow of transfer to the fiscal authority. [ … ] The benefit, in the case of the UK, is often seen to be one of transparency. It makes very clear that the Bank of England is wholly owned by the Treasury, backstopped by the UK taxpayer. Set against that, [ … ] the Fed approach offers them more financial independence and in that sense can perhaps enhance their credibility around operational independence.110

89. Referring to the 2012 arrangement to remit profits and losses on a quarterly basis, Professor Chadha added that “I personally would have preferred the APF to be treated as a separate vehicle and not have remitted profits[ … ] so we could have examined the whole of the process at the end.”111 As we discussed above (paragraph 58), the 2012 arrangement boosted the public finances from 2012 to 2021, increasing headroom against the fiscal rules other things being equal. From 2022, had the earlier profits remained in the APF, these might have been used to cover losses initially, rather than calling on the Treasury indemnity and reducing fiscal headroom.

90. The Governor pointed out to us that “you can’t make these cash flows disappear” and argued that the Fed’s arrangements would be difficult to replicate in the UK:

The big difference is that the Federal Reserve retains on its own accounts what is called the seigniorage, which is the profit of the note issue. That seigniorage can then be used to, in a sense, offset the cash flow on QE and QT. We do not retain seigniorage. That was settled in the Bank Charter Act 1844.112

91. QE and QT losses, the fiscal rules, the regular remittances of profits arising from QE from the Bank to the Treasury and indemnity payments to cover losses from the Treasury to the Bank interact to create direct and immediate links between monetary policy decisions and fiscal policy. The current losses thereby have worrying implications for public spending, taxation and borrowing, and for the operational independence of monetary policy.

92. The Treasury should examine whether it is appropriate that ongoing indemnity payments are included in the debt targeted by the fiscal rules, subject to maintaining the credibility of the UK’s macroeconomic framework. For any future rounds of QT, the Treasury and Bank should commit to revisiting whether it would be possible and appropriate to account for profits and losses in a way analogous to the deferred or derivate asset approach being employed in the US and elsewhere. In particular, the 2012 decision to remit cashflows quarterly between the Bank and the Treasury should be reconsidered, should future QE generate profits.

Conclusions and recommendations

The Bank’s strategy for quantitative tightening

1. There are a variety of views about the desirability of the Bank of England undertaking quantitative tightening (QT), whether it has a good strategic framework for doing so, and whether it is conducting QT at an appropriate pace. Nonetheless, much of the evidence we have received suggests that the Bank’s strategic framework for QT is broadly reasonable. We have also heard that shrinking the Bank’s balance sheet in order to create space for future interventions, should they be needed, and reducing distortions in the gilt market caused by quantitative easing (QE), are potential reasons for going ahead with QT. (Paragraph 20)

2. Since it has some bearing on our later conclusions, we note here that the Bank and Monetary Policy Committee (MPC) have determined: that QT is not being used as an active tool of monetary policy; that they are calibrating QT in order to minimise its economic and financial impacts; and that they are carrying out QT with a view to creating space for future balance sheet expansion, such as quantitative easing (QE), should it be needed. We also note that we have received some concern that the Bank needs a good understanding of the economic and financial impacts of QT in order to calibrate its strategy. (Paragraph 21)

3. One area in which the Bank’s strategy is less well established regards the long-term steady-state size and composition of its balance sheet, which may have a bearing on the longer-term conduct of QT and which, as we note later, may have implications for fiscal as well as monetary and financial stability policy. (Paragraph 22)

4. The Bank should develop its planning on this long-term steady-state size and composition of its balance sheet, and how this relates to QT, in more detail and give regular public updates on the likely future size and composition of its balance sheet. (Paragraph 23)

The macroeconomic and financial impact of quantitative tightening

5. QT is a comparatively untested monetary policy tool, and it is understandable that the Bank would find it challenging to model its effects as part of its forecast. We have seen supporting evidence for the Bank’s contention that it is having and will have a small impact on the economy. That said, we are concerned that the Bank is taking a ‘leap in the dark’ by embarking upon a major monetary operation without specifically and separately tracking its effects. As we noted above, there is a spread of views about the appropriate pace of and risks around QT, including a risk that QT is tightening monetary conditions by more than the Bank thinks. The MPC’s ability to set the appropriate course of monetary policy could be improved if it has as full as possible an understanding of QT’s effects either at the pre-announced pace or in alternative scenarios. (Paragraph 37)

6. The Bank should develop its forecasting and modelling tools for understanding the impact of QT and look to how these can be integrated into the forecasting and communication process. Given the uncertainty over its effects, the Bank should also update Parliament and the public on QT at each quarterly Monetary Policy Report, rather than at an annual review only. At these reviews, it could examine the impact of QT on the money supply and the consequences for growth and inflation. (Paragraph 38)

7. 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. (Paragraph 49)

8. 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. (Paragraph 50)

9. Given the unusually high extent of gilt sales in the coming years, the Bank and the Debt Management Office should publish more frequent updates on gilt market participant demand and sentiment. (Paragraph 51)

The fiscal impact of quantitative easing and tightening

10. Notwithstanding the need to ensure that the programmes are compatible with the operational independence of monetary policy, it strikes us as highly anomalous that decisions have been and are being taken about QE and QT concerning huge sums of public money without any regard to the usual value-for-money requirements. This may have been more easily tolerable had QE remained at the relatively modest scale originally envisaged, or had a lifetime loss remained an unlikely scenario rather than the central projection. As it is, with the benefit of hindsight there is no reason to think that the indemnity and cashflow arrangements devised in 2009 and 2012 are the most suitable available. (Paragraph 64)

11. We recognise that QE and QT are processes already well in train, and it may not be possible to make large changes to the arrangements made in 2009 and 2012 without impacts on the credibility of the UK macroeconomic framework. However, as we have noted, the Bank is undertaking QT in part to create space should it need to undertake QE or another form of balance sheet expansion in future. Given what we now know, any future QE should not proceed automatically under the existing arrangements. Instead, the arrangements should be revisited in the light of the implications for value-for-money, public spending and Bank independence that we outline below. (Paragraph 65)

12. 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 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. (Paragraph 69)

13. That being so, while it is right that MPC members should have monetary policy and the inflation target foremost in their thinking and decision-making, the Bank and Treasury should explore how criteria on value for money and the spending power of the Treasury could be included in decisions about the ongoing pace and timing of QT. (Paragraph 69)

14. It is right to say that the overall effectiveness and value-for-money of QE and QT should be judged by their wider macroeconomic impacts on inflation, growth, and employment, rather than on the direct fiscal costs alone. There is agreement among many that certain rounds of QE, especially the initial rounds, were effective and easily justify the later fiscal cost. However, there is a spread of views about the relative economic impact of later rounds of QE, including, it seems, among Bank officials. (Paragraph 75)

15. In its response to this report, the Bank should set out whether it thinks that all individual rounds of QE have proved to be good value for money considering the later fiscal cost. In any future QE, lessons should be learned about the effectiveness of each round of QE over 2009 to 2021 and how it might be used more selectively, partly with reference to the fiscal implications. (Paragraph 75)

16. The Chancellor’s role in approving changes in the size or composition of the APF that houses the QE and QT programme remains unclear to us, since on one hand the Chancellor insists that decisions over QE and QT are taken independently by the MPC and cannot be commented upon, while on the other hand the Chancellor’s authorisation is “accompanied by assessment of the macro-economic and fiscal impacts.” (Paragraph 76)

17. The Treasury should clarify whether the Chancellor’s authorisation of changes to the APF involves a substantial decision or is only a formal endorsement of the MPC’s decision, and explain the extent of the assessment of macro-economic and fiscal impacts that accompanies each authorisation. In particular, the Treasury should confirm whether or not there was a threshold at which the indemnity would not be provided. (Paragraph 76)

18. We have received proposals for interventions that would cut the remuneration of bank reserves and thereby reduce the ongoing losses arising from QE and QT. However, we have also received evidence that cutting remuneration now could be similar to a default, and that any scheme tied to commercial banks’ holdings of reserves could undermine financial stability. Overall, we do not support cutting the renumeration of Bank reserves. We believe taxes on banks should be set through Parliament in a Finance Bill. (Paragraph 81)

19. Some witnesses thought that the remuneration of reserves would need to be reconsidered once reserves had reached their future steady-state level. However, there is a lack of information about future arrangements for the Bank’s balance sheet once the steady-state level of reserves is reached. (Paragraph 82)

20. The Bank and Treasury should clarify the future arrangements for the steady-state level of reserves on the Bank’s balance sheet as soon as possible, including the future of QT at that point, the assets that will be used to back reserves, the remuneration of those reserves, and the implications for the Bank’s profits and losses and the Treasury indemnity. (Paragraph 83)

21. QE and QT losses, the fiscal rules, the regular remittances of profits arising from QE from the Bank to the Treasury and indemnity payments to cover losses from the Treasury to the Bank interact to create direct and immediate links between monetary policy decisions and fiscal policy. The current losses thereby have worrying implications for public spending, taxation and borrowing, and for the operational independence of monetary policy. (Paragraph 91)

22. The Treasury should examine whether it is appropriate that ongoing indemnity payments are included in the debt targeted by the fiscal rules, subject to maintaining the credibility of the UK’s macroeconomic framework. For any future rounds of QT, the Treasury and Bank should commit to revisiting whether it would be possible and appropriate to account for profits and losses in a way analogous to the deferred or derivate asset approach being employed in the US and elsewhere. In particular, the 2012 decision to remit cashflows quarterly between the Bank and the Treasury should be reconsidered, should future QE generate profits. (Paragraph 92)

Formal minutes

Wednesday 31 January 2024

Members present

Harriett Baldwin, in the Chair

John Baron

Dr Thérèse Coffey

Dame Angela Eagle

Stephen Hammond

Danny Kruger

Keir Mather

Anne Marie Morris

Quantitative Tightening

Draft Report (Quantitative Tightening), proposed by the Chair, brought up and read.

Ordered, That the Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 92 read and agreed to.

Summary agreed to.

Resolved, That the Report be the Fifth Report of the Committee to the House.

Ordered, That the Chair make the Report to the House.

Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.

Adjournment

Adjourned till Tuesday 6 February at 9.30 am.


Witnesses

The following witnesses gave evidence. Transcripts can be viewed on the inquiry publications page of the Committee’s website.

Tuesday 18 April 2023

Professor Jagjit S. Chadha, Director, National Institute of Economic and Social Research (NIESR); Dr Gerard Lyons, Chief Economic Strategist, Netwealth; Dr Katharine Neiss, Chief European Economist, PGIM Fixed Income; Andrew Sentance, Senior Advisor, Cambridge Econometrics, External Member, Monetary Policy Committee, 2006–11Q1–55

Thursday 18 May 2023

Andrew Bailey, Governor, Bank of England; Ben Broadbent, Deputy Governor, Monetary Policy, Bank of England; Dave Ramsden, Deputy Governor, Markets and Banking, Bank of EnglandQ56–128


Published written evidence

The following written evidence was received and can be viewed on the inquiry publications page of the Committee’s website.

QT numbers are generated by the evidence processing system and so may not be complete.

1 Allen, Mr William (NIESR) (QT0003)

2 Breedon, Professor Francis; Carbo, Ms Paula Bejarano; and Chadha, Professor Jagjit (QT0009)

3 Chapman, Mr Meyrick and Marsh, Mr Chris (QT0004)

4 Clark, Andre (QT0001)

5 Handelsbanken plc (QT0010)

6 Johnson, Nigel (QT0002)

7 Blanchflower, Professor David and Murphy, Professor Richard (QT0012)

8 New Economics Foundation (QT0007)

9 Positive Money (QT0006)

10 Steeley, Professor James (QT0008)

11 Trades Union Congress (QT0011)

12 Fivar Ltd) (QT0005)

13 Weale, Martin (QT0013)


List of Reports from the Committee during the current Parliament

All publications from the Committee are available on the publications page of the Committee’s website.

Session 2023–24

Number

Title

Reference

1st

The digital pound: still a solution in search of a problem?

HC 215

2nd

Edinburgh Reforms One Year On: Has Anything Changed?

HC 221

3rd

Appointment of Nathanaël Benjamin to the Financial Policy Committee

HC 443

4th

The work of the Sub-Committee on Financial Services Regulations: January 2024

HC 496

1st Special

The Digital Pound: A solution in search of a problem?: Government and Bank of England Response to the Committee’s First Report

535

Session 2022–23

Number

Title

Reference

1st

Future of financial services regulation

HC 141

2nd

Future Parliamentary scrutiny of financial services regulations

HC 394

3rd

The appointment of Dr Swati Dhingra to the Monetary Policy Committee

HC 460

4th

Jobs, growth and productivity after coronavirus

HC 139

5th

Appointment of Marjorie Ngwenya to the Prudential Regulation Committee

HC 461

6th

Appointment of David Roberts as Chair of Court, Bank of England

HC 784

7th

Re-appointment of Sir Dave Ramsden as Deputy Governor for Markets and Banking, Bank of England

HC 785

8th

Autumn Statement 2022 – Cost of living payments

HC 740

9th

Appointment of Ashley Alder as Chair of the Financial Conduct Authority

HC 786

10th

The work of the Sub-Committee on Financial Services Regulations

HC 952

11th

Fuel Duty: Fiscal forecast fiction

HC 783

12th

Appointment of Professor Randall Kroszner to the Financial Policy Committee

HC 1029

13th

Scam reimbursement: pushing for a better solution

HC 939

14th

The work of the Sub-Committee on Financial Services Regulations

HC 952-i

15th

Regulating Crypto

HC 615

16th

Tax Simplification

HC 723

17th

The appointment of Megan Greene to the Monetary Policy Committee

HC 1395

18th

The work of the Sub- Committee on Financial Services Regulations

HC 952-ii

19th

The venture capital market

HC 134

20th

Tax Reliefs

HC 723

1st Special

Defeating Putin: the development,implementation and impact of economic sanctions on Russia: Government Response to the Committee’s Twelfth Report of Session 2021–22

HC 321

2nd Special

Future of financial services regulation: responses to the Committee’s First Report

HC 690

3rd Special

Jobs, growth and productivity after coronavirus: Government response to the Committee’s Fourth Report

HC 861

4th Special

Autumn Statement 2022 – Cost of living payments: Government response to the Committee’s Eighth Report

HC 1166

5th Special

Fuel Duty: Fiscal forecast fiction: Government response to the Committee’s Eleventh Report

HC 1242

6th Special

Scam reimbursement: pushing for a better solution: Payment Systems Regulator’s response to the Committee’s Thirteenth Report

HC 1500

7th Special

Regulating Crypto: Government Response to the Committee’s Fifteenth Report

HC 1752

8th Special

Tax Reliefs: Government Response to the Committee’s Twentieth Report

HC 1875

9th Special

Venture Capital: Government Response to the Committee’s Nineteenth Report of Session 2022–23

HC 1876

Session 2021–22

Number

Title

Reference

1st

Tax after coronavirus: the Government’s response

HC 144

2nd

The appointment of Tanya Castell to the Prudential Regulation Committee

HC 308

3rd

The appointment of Carolyn Wilkins to the Financial Policy Committee

HC 307

4th

The Financial Conduct Authority’s Regulation of London Capital & Finance plc

HC 149

5th

The Future Framework for Regulation of Financial Services

HC 147

6th

Lessons from Greensill Capital

HC 151

7th

Appointment of Sarah Breeden to the Financial Policy Committee

HC 571

8th

The appointment of Dr Catherine L. Mann to the Monetary Policy Committee

HC 572

9th

The appointment of Professor David Miles to the Budget Responsibility Committee of the Office for Budget Responsibility

HC 966

10th

Autumn Budget and Spending Review 2021

HC 825

11th

Economic crime

HC 145

12th

Defeating Putin: the development, implementation and impact of economic sanctions on Russia

HC 1186

1st Special

Net Zero and the Future of Green Finance: Responses to the Committee’s Thirteenth Report of Session 2019–21

HC 576

2nd Special

The Financial Conduct Authority’s Regulation of London Capital & Finance plc: responses to the Committee’s Fourth Report of Session 2021–22

HC 700

3rd Special

Tax after coronavirus: response to the Committee’s First Report of Session 2021–22

HC 701

4th Special

The Future Framework for Regulation of Financial Services: Responses to the Committee’s Fifth Report

HC 709

5th Special

Lessons from Greensill Capital: Responses to the Committee’s Sixth Report of Session 2021–22

HC 723

6th Special

The appointment of Professor David Miles to the Budget Responsibility Committee of the Office for Budget Responsibility: Government response to the Committee’s Ninth Report

HC 1184

7th Special

Autumn Budget and Spending Review 2021: Government Response to the Committee’s Tenth Report

HC 1175

8th Special

Economic Crime: responses to the Committee’s Eleventh Report

HC 1261

Session 2019–21

Number

Title

Reference

1st

Appointment of Andrew Bailey as Governor of the Bank of England

HC 122

2nd

Economic impact of coronavirus: Gaps in support

HC 454

3rd

Appointment of Richard Hughes as the Chair of the Office for Budget Responsibility

HC 618

4th

Appointment of Jonathan Hall to the Financial Policy Committee

HC 621

5th

Reappointment of Andy Haldane to the Monetary Policy Committee

HC 620

6th

Reappointment of Professor Silvana Tenreyro to the Monetary Policy Committee

HC 619

7th

Appointment of Nikhil Rathi as Chief Executive of the Financial Conduct Authority

HC 622

8th

Economic impact of coronavirus: the challenges of recovery

HC 271

9th

The appointment of John Taylor to the Prudential Regulation Committee

HC 1132

10th

The appointment of Antony Jenkins to the Prudential Regulation Committee

HC 1157

11th

Economic impact of coronavirus: gaps in support and economic analysis

HC 882

12th

Tax after coronavirus

HC 664

13th

Net zero and the Future of Green Finance

HC 147

1st Special

IT failures in the financial services sector: Government and Regulators Responses to the Committee’s Second Report of Session 2019

HC 114

2nd Special

Economic Crime: Consumer View: Government and Regulators’ Responses to Committee’s Third Report of Session 2019

HC 91

3rd Special

Economic impact of coronavirus: Gaps in support: Government Response to the Committee’s Second Report

HC 662

4th Special

Economic impact of coronavirus: Gaps in support: Further Government Response

HC 749

5th Special

Economic impact of coronavirus: the challenges of recovery: Government Response to the Committee’s Eighth Report

HC 999

6th Special

Economic impact of coronavirus: gaps in support and economic analysis: Government Response to the Committee’s Eleventh Report

HC 1383


Footnotes

1 Bank of England, Monetary Policy Summary and Minutes of the Monetary Policy Committee meeting ending on 20 September 2023, 21 September 2023

2 See Bank of England, ‘Bank of England announces gilt market operation,’ 28 September 2022; and Bank of England, ‘Bank of England confirms APF gilts sales for Q4 2022,’ 18 October 2022

3 Bank of England, Results and usage data, https://www.bankofengland.co.uk/markets/bank-of-england-market-operations-guide/results-and-usage-data, accessed 1 February 2024 and Bank of England, ‘Monetary Policy Summary and Minutes of the Monetary Policy Committee meeting ending on 20 September 2023,’ 21 September 2023. The Bank’s convention is to measure the QE programme in terms of the proceeds originally used to buy the gilts. This is equal to the reserves the Bank issued to pay for the gilts, which are still in circulation, and the amount covered by the Treasury indemnity (see Chapter 4:). The current market value of the gilts held by the Bank in the APF is somewhat less, at £559 billion as of 12 December 2023 (Bank of England, Letter from the Governor of the Bank of England to the Chair of the Treasury Committee re Cashflows arising from quantitative easing and tightening, 18 December 2023)

4 The Reserve Bank of New Zealand was the first to begin active QT, a few months ahead of the Bank in July 2022, although the RBNZ sells back directly to the government rather than the secondary market. The Federal Reserve had previously engaged in passive QT from 2017 to 2019. See Reserve Bank of New Zealand, Large scale asset purchase programme, https://www.rbnz.govt.nz/monetary-policy/monetary-policy-tools/large-scale-asset-purchase-programme, last modified 23 March 2022, and Federal Reserve Bank of Richard, Econ Focus Third Quarter 2022, ‘The Fed Is Shrinking Its Balance Sheet. What Does That Mean?,’ 6 September 2022

5 Oral evidence taken on 19 October 2022, HC (2022–23) 740 Q92

6 The call for evidence for this inquiry can be found on the Treasury Committee website.

7 In 2009, the MPC said 0.5 per cent was the effective minimum for Bank rate, beyond which cuts would have undermining side-effects on commercial bank balance sheets. It has since stated that the effective minimum is 0.15 per cent.

8 QE between 2009 and 2021 compromised a £875 billion gilt purchase programme and a £20 billion Corporate Bond Purchase Scheme. Throughout this report, QE refers only to the much larger-scale purchases of gilts, unless otherwise stated.

9 Q57

10 Q58

11 Q58 and Q65

12 Q69, and Oral evidence taken on 19 October 2022, HC (2023–24) 211, Q974

13 Q58 and Q70

14 Q57; and Bank of England, Explanatory Note: Managing the operational implications of APF unwind for asset sales, control of short-term market interest rates and the Bank of England’s balance sheet, 4 August 2022

15 Bank of England, ‘‘Less is more’ or ‘Less is a bore’? Re-calibrating the role of central bank reserves – speech by Andrew Hauser,’ 3 November 2023; and Q76. QT is a major contributor to the shrinking of the Bank’s balance sheet, while the Term Funding Scheme with additional incentives for SMEs (TFSME), which stood at £152 billion as of 31 January 2024, is also winding down.

16 European Central Bank, ‘Monetary policy decisions,’ 15 December 2022; and European Central Bank, ‘Speech by Christine Lagarde, President of the ECB, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament,’ 25 September 2023

17 Board of Governors of the Federal Reserve System, ‘Balance Sheet Normalization Principles and Plans,’ 20 March 2019; Board of Governors of the Federal Reserve System, ‘Principles for Reducing the Size of the Federal Reserve’s Balance Sheet,’ 26 January 2022; and Board of Governors of the Federal Reserve System, ‘Transcript of Chair Powell’s Press Conference December 13 2023,’ 13 December 2023;

18 Q5. In saying that the Bank had been “forward-looking”, Dr Neiss had been particularly referring to a speech delivered by the Governor in 2020 (Bank of England, ‘The central bank balance sheet as a policy tool: past, present and future - speech by Andrew Bailey,’ 28 August 2020): “They were earlier than the Fed and the ECB, certainly, in doing quantitative tightening, but they were also very early in just talking about it. Governor Bailey gave a speech in the summer of 2020; he talked about the need to manage down the central bank’s balance sheet at some point in the future, the reason being that essentially QE worked. […] He talked about this at a time when most central banks were out there buying large amounts of assets. It was very forward-looking in that regard.”

19 Qq7–8 and Martin Weale (Professor of Economics at Kings College London) (QT0013). Professor James Steeley wrote that the “steady, and seemingly predictable, path provides some stability for the market, while the flexibility they have included provides for greater sales should that be needed to support gilt market functioning,” and that such sales are “much easier, and likely far less disruptive, when [the Bank] does not already own particular gilts in particularly large quantity.” Professor James Steeley (Professor of Finance and Head of the Department of Economics and Finance at Brunel University London) (QT0008).

20 Q8

21 For example, Mr Meyrick Chapman (CEO at Hedge Analytics Ltd); Mr Chris Marsh (Chief Economic Advisor at Exante Data) (QT0004)

22 Prof Francis Breedon (Professor at Queen Mary University of London); Ms. PAULA BEJARANO CARBO (Economist at NIESR); Prof Jagjit Chadha (Director at NIESR) (QT0009) and Handelsbanken plc (QT0010). According to the latter: “Active QT was initiated in order to smooth out the path of balance sheet unwinding, filling in gaps between what would otherwise be a lumpy schedule of passive QT. Without active QT, there would have been no QT taking place from October 2022 all the way until July 2023.”

23 Qq2–3 and Q19. Dr Sentence continued: “[QT] is like a supplementary or supporting aspect of monetary policy, but it would be a bit bizarre if, as we are, we were in the position of raising interest rates—they may even need to go higher in order to get on top of inflation—and we did absolutely nothing on the quantitative easing front.”

24 Q9

25 Q11

26 Q17. See also Professor David Blanchflower and Professor Richard Murphy (QT0012), Mr Meyrick Chapman (CEO at Hedge Analytics Ltd); Mr Chris Marsh (Chief Economic Advisor at Exante Data) (QT0004), and Positive Money (QT0006). The former argue “we can find no reason to undertake QT and cannot therefore […] suggest its abandonment” and recommend “a new QE programme of at least £50 billion a year for the next four years replace that QT policy.”

27 Mr Meyrick Chapman (CEO at Hedge Analytics Ltd); Mr Chris Marsh (Chief Economic Advisor at Exante Data) (QT0004) and Prof Francis Breedon (Professor at Queen Mary University of London); Ms. PAULA BEJARANO CARBO (Economist at NIESR); Prof Jagjit Chadha (Director at NIESR) (QT0009)

28 Bank of England, ‘Monetary Policy Report August 2021,’ 5 August 2021

29 Bank of England, Monetary Policy Summary and Minutes of the Monetary Policy Committee meeting ending on 3 August 2022, 4 August 2022

30 Oral evidence taken on 19 October 2022, HC (2022–23) 143, Q714

31 Q72

32 Bank of England, Monetary Policy Report August 2023, 3 August 2021

33 Q72

34 Bank of England, Monetary Policy Summary and Minutes of the Monetary Policy Committee meeting ending on 1 November 2023, 2 November 2023 and Oral evidence taken on 21 November 2023, HC (2023–24) 211, Q975

35 Qq24–25

36 Handelsbanken plc (QT0010)

37 Q25 -If the point is that [QE] is state-contingent, the reverse of that policy, QT or quantitative normalisation, would be more likely to have an impact on markets when they are themselves at points of stress. There are points when there is ample liquidity. […] Markets understand the conditions under which bank rate will be changed. There is a good understanding of the path, or the likely path. It is unlikely to have a large impact on bond prices because it is done at a time where there is no stress.

38 Martin Weale (Professor of Economics at Kings College London) (QT0013)

39 Q11 and Q17

40 Oral evidence taken on 5 July 2023, HC (2022–23) 1667, Q2

41 Oral evidence taken on 5 July 2023, HC (2022–23) 1667, Q3 and Q33

42 Bank of England, Monetary Policy Report November 2023, Chart 2.7, 2 November 2023

43 Oral evidence taken on 21 November 2023, HC (2023–24) 211, Q1010 and Oral evidence taken on 19 October 2022, HC (2022–23) 143, Q881

44 Mr Meyrick Chapman (CEO at Hedge Analytics Ltd); Mr Chris Marsh (Chief Economic Advisor at Exante Data) (QT0004)

45 Martin Weale (Professor of Economics at Kings College London) (QT0013)

46 Oral evidence taken on 21 November 2023, HC (2023–24) 211, Qq1011–1012

47 Office for Budget Responsibility, Economic and fiscal outlook — November 2023, Paragraphs 4.79 and 4.80, and Chart 4.16, 22 November 2023

48 Debt Management Office, Revision to the DMO’s financing remit 2023–24: Autumn Statement 2023, 22 November 2023

49 Bank of England, Financial Stability Report December 2023, Box D, 6 December 2023

50 Bank of England, Monetary Policy Report August 2023, Box A, 3 August 2021

51 Bank of England, ‘Quantitative tightening: the story so far—speech by Dave Ramsden,’ 19 July 2023

52 Q10, Q17, Q20, Q26 and Q5. Professor Chadha told us: “I f there is a liquidity problem, that can also be solved with injections of liquidity. We have seen that happen very recently […] with the episode of making the Bank the market-maker of last resort [when the Bank purchased gilts in response to the LDI crisis in September and October 2022], but also by providing extensive central Bank swap lines for liquidity as well.”

53 See Handelsbanken plc (QT0010), Prof Francis Breedon (Professor at Queen Mary University of London); Ms. PAULA BEJARANO CARBO (Economist at NIESR); Prof Jagjit Chadha (Director at NIESR) (QT0009), and Professor James Steeley (Professor of Finance and Head of the Department of Economics and Finance at Brunel University London) (QT0008)

54 See Bank of England, Monetary Policy Summary and minutes of the Monetary Policy Committee meeting held on 21 September 2021, 22 September 2022 and Oral evidence taken on 19 October 2022, HC (2022–23) 740 Qq61–64. Formally, the ‘mini-budget’ was a ministerial statement entitled “The Growth Plan 2022”— HM Treasury, The Growth Plan 2022, CP 743, September 2022

55 See Bank of England, ‘Bank of England announces gilt market operation,’ 28 September 2022; Oral evidence taken on 19 October 2022, HC (2022–23) 740 Qq120–122; Bank of England, ‘Bank of England confirms APF gilts sales for Q4 2022,’ 18 October 2022; and Bank of England, ‘Bank of England completes unwind of recent financial stability gilt purchases,’ 12 January 2023

56 Positive Money (QT0006) says that it “may have been a driving factor.”

57 Q5

58 Prof Francis Breedon (Professor at Queen Mary University of London); Ms. PAULA BEJARANO CARBO (Economist at NIESR); Prof Jagjit Chadha (Director at NIESR) (QT0009)

59 Mr William Allen (Visitor at National Institute for Economic and Social Research) (QT0003). Mr Allen continues: “A complete contingency plan would need to allow for close collaboration between the Bank of England and the DMO [Debt Management Office]. For example, there would need to be understandings about which agency was to be responsible for determining the prices at which gilt auctions were to be underwritten, if underwriting proved necessary. And if market conditions suggested that it might be desirable to cancel auctions, it would obviously be necessary for the DMO and the Bank of England to make consistent decisions. “

60 Bank of England, ‘A journey of 1000 miles begins with a single step: filling gaps in the central bank liquidity toolkit - speech by Andrew Hauser,’ 28 September 2023 Mr Hauser said that “although [gilt purchases] were highly effective in restoring stability, they also posed material risks – to market incentives, to public sector balance sheets, and to perceptions of the monetary stance.”

61 Q61, Q71, Q91 and Qq123–124

62 Q100 and Q65

63 The APF was set up in part as a vehicle for this indemnity, but since 2018, the Bank of England’s core balance sheet has also been explicitly backstopped by the Treasury. since 2018

64 The House of Lords Economic Affairs Committee has recommended that the Treasury should pubished the ‘Deed of Indemnity’ contractual document that forms the legal basis of the indemnity. See Economic Affairs Committee, ‘Quantitative easing: a dangerous addiction?’ (First report, Session 2021–22, HL 42) and Economic Affairs Committee, ‘Making an independent Bank of England work better,’ (First report, Session 2023–24, HL 10)

65 HM Treasury, Letter from the Chancellor of the Exchequer to the Governor of the Bank of England re Asset Purchase Facility, 3 March 2009

66 Mr William Allen (Visitor at National Institute for Economic and Social Research) (QT0003)

67 Q115

68 Q116. The Bank Governor elaborated on these value-for-money arrangements in a letter to us—Bank of England, Letter from the Governor of the Bank of England to the Chair of the Treasury Committee re Cashflows arising from quantitative easing and tightening, 18 December 2023

69 Q118

70 HM Treasury, Letter from the Permanent Secretary to the Chair of the Treasury Committee, 15 December 2023

71 For example, Oral evidence taken on 21 July 2021, HC (2021–22) 573 Q34

72 Mr William Allen (Visitor at National Institute for Economic and Social Research) (QT0003)

73 Bank of England, Letter from the Governor to the Chancellor of the Exchequer, 9 November 2012; and HM Treasury, Letter from the Chancellor of the Exchequer to the Governor of the Bank of England re Transfer of excess cash from the Asset Purchase Facility to HM Treasury, 9 November 2012. The Treasury initially indemnified £100 billion of gilt purchases, but by 2012 it was indemnifying £375 billion.

74 HM Treasury, Letter from the Permanent Secretary to the Chair of the Treasury Committee, 15 December 2023

75 Bank of England, Letter from the Governor to the Chairman of the Treasury Committee, 24 November 2011; House of Commons - Treasury - Minutes of Evidence (parliament.uk) Q21 (July 2010), and House of Commons - Treasury - Minutes of Evidence (parliament.uk) Q56 and Q61 (November 2011).

76 Oral evidence taken on 14 May 2013, HC (2013–14) 96–I, Q237. In 2010, Lord King announced at his 2010 Mansion House speech the principle that Bank Rate would be moved before QE was withdrawn, which was borne out when QT was launched in 2022. Bank of England, Speech by Mervyn King at the Lord Mayor’s Banquet at the Mansion House, 16 June 2010

77 Professor David Blanchflower and Professor Richard Murphy (QT0012)

78 Oral evidence taken on 16 July 2013, HC (2013–14) 902, Qq350–351 and Q357

79 Written evidence submitted by Professor Jagjit Chadha and Jack Meaning, University of Kent, November 2012

80 Oral evidence taken on 21 November 2023, HC (2023–24) 211, Q987

81 Bank of England, Asset Purchase Facility Quarterly Report – 2023 Q3, 3 November 2023 and Bank of England, Letter from the Governor of the Bank of England to the Chair of the Treasury Committee re Cashflows arising from quantitative easing and tightening, 18 December 2023. One £90 billion figure assumes that interest rates follow the market path as of 12 December 2023, while the £50 billion figure assumes that interest rates return to Bank staff’s (somewhat lower) estimate of the equilibrium interest rate within three years. The £90 billion figure is taken from the latter source, whereas the corresponding figure in the former source, based on market data from 29 September 2023, was £130 billion. As the Governor’s letter states, this “illustrat[es] the sensitivity of the projections to changes in market interest rates.”

82 Financial Times, ‘Bank of England losses on QE greater than other central banks, says ex-rate setter,’ 21 December 2023

83 Prof Francis Breedon (Professor at Queen Mary University of London); Ms. PAULA BEJARANO CARBO (Economist at NIESR); Prof Jagjit Chadha (Director at NIESR) (QT0009)

84 Bank of England, Letter from the Governor of the Bank of England to the Chair of the Treasury Committee re Cashflows arising from quantitative easing and tightening, 18 December 2023. In oral evidence, the Governor has told us “Whether you unwind by selling or waiting for them to mature, one strategy does not avoid loss. […] In one strategy, the loss accrues via the carry cost of the bonds because of the difference in interest rates between the one you pay and the one you receive. In the other one, you crystallise it when you sell.” Oral evidence taken on 21 November 2023, HC (2023–24) 211, Qq984–985.

85 Q39

86 Q70

87 Q54

88 Q36

89 Q113; Bank of England, Letter from the Governor of the Bank of England to the Chair of the Treasury Committee re Cashflows arising from quantitative easing and tightening, 18 December 2023; and HM Treasury, ‘Letter from the Permanent Secretary to the Chair of the Treasury Committee,’ 15 December 2023

90 Q12, Qq34–35, Qq37–38

91 Q16 and Q50

92 Bank of England, ‘Monetary policy: prices versus quantities - speech by Ben Broadbent,’ 25 April 2023

93 Bank of England, ‘Quantitative easing and quantitative tightening − speech by Silvana Tenreyro,’ 4 April 2023

94 Oral taken on 29 November 2023, HC (2023–24) 286, Q221

95 HM Treasury, Letter from the Permanent Secretary to the Chair of the Treasury Committee, 15 December 2023

96 For example, see Martin Weale (Professor of Economics at Kings College London) (QT0013) and Handelsbanken plc (QT0010)

97 New Economics Foundation (QT0007), Prof Francis Breedon (Professor at Queen Mary University of London); Ms. PAULA BEJARANO CARBO (Economist at NIESR); Prof Jagjit Chadha (Director at NIESR) (QT0009), and Martin Weale (Professor of Economics at Kings College London) (QT0013).
In 2021, NIESR had argued that while interest rates were still low commercial banks could be required to exchange reserves for newly-issued medium-term gilts, with the intention of saving fiscal costs in the event that interest rates rose (see Mr William Allen (Visitor at National Institute for Economic and Social Research) (QT0003). In oral evidence, Professor Chadha said that “that moment has gone, so let us just take that as something that we suggested” (Q45).

98 Oral evidence taken on 21 November 2023, HC (2023–24) 211, Qq993–997

99 Q46

100 Q50, Q47, Q44

101 HM Treasury, Letter from the Permanent Secretary to the Chair of the Treasury Committee, 15 December 2023; and Bank of England, Letter from the Governor of the Bank of England to the Chair of the Treasury Committee re Cashflows arising from quantitative easing and tightening, 18 December 2023.

102 Public Accounts Committee, Oral evidence taken on 7 December 2023, HC (2023–24) 74, Q11

103 Office for Budget Responsibility, Economic and fiscal outlook — November 2023, Charts 4.E and 5.1, 22 November 2023

104 Oral evidence taken on 28 November 2023, HC (2023–24) 286, Qq109–110

105 Q53. In written evidence, Positive Money (QT0006) were concerned that “the Bank of England may be undertaking aggressive QT in order to combat accusations of ‘fiscal dominance’”.

106 For example, Bank of England, Letter from the Governor of the Bank of England to the Chair of the Treasury Committee re Cashflows arising from quantitative easing and tightening, 18 December 2023; and HM Treasury, Letter from the Permanent Secretary to the Chair of the Treasury Committee, 15 December 2023

107 Federal Reserve Bank of St Louis, ‘The Fed’s Remittances to the Treasury: Explaining the ‘Deferred Asset’,’ On the Economy Blog, 21 November 2023. That article projects that the Fed will return to profit in 2025 and resume remittances to the US Treasury in 2027. Another article by former Federal Reserve and, in the latter case, Bank of England officials William B. English and Donald Kohn states that the Fed should not worry about holding these losses on its balance sheet and continue to operate normally and implement monetary policy, since “the Fed can’t default because it can always create reserves to pay its bills.” Only in the extreme case that this reserve creation was undermining monetary policy would the Fed require fiscal support. William B. English and Donald Kohn, ‘What if the Federal Reserve books losses because of its quantitative easing?,’ Brookings Commentary, 1 June 2022.

108 Bank of Canada, Quarterly Financial Report - Third Quarter 2022, 29 November 2022

109 Mr Meyrick Chapman (CEO at Hedge Analytics Ltd); Mr Chris Marsh (Chief Economic Advisor at Exante Data) (QT0004)

110 Q39

111 Q41

112 Q113