Quantitative Tightening – Report Summary

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

Author: Treasury Committee

Related inquiry: Quantitative Tightening

Date Published: 7 February 2024

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The Bank of England is almost two years into the process of quantitative tightening (QT)—the winding down of its holdings of Government debt built up through quantitative easing (QE). Given the limited international experience of QT, and its being undertaken against a challenging economic backdrop, we held an inquiry investigating various aspects of QT including its impact on the economy and financial stability and its (and QE’s) fiscal consequences.

We have heard that the Bank’s strategic framework and rationale for QT is broadly reasonable, and 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 QE, are reasons for going ahead. But the Bank’s strategy is less well established as regards the long-term steady-state size and composition of its balance sheet. We recommend that the Bank develops its planning in this area in more detail and gives regular public updates.

The Bank is uncertain about the macroeconomic and money supply effects of QT, although it believes that, by design, QT is having and will have a small impact. But 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. We recommend that the Bank develop its forecasting and modelling tools for understanding the impact of QT and update Parliament and the public on QT at each quarterly Monetary Policy Report.

QT is an untested intervention in a gilt market that is also faced with an unusually high sustained rate of conventional gilt issuance. While there are no clear signs that QT has resulted in financial stability issues to date, the events of March 2020 and September 2022 have shown that the gilt market can deteriorate rapidly. We endorse the Bank’s work on a new backstop facility, which should be worked on as a priority. We recommend that the Bank consider whether an additional fully-developed contingency plan for intervention in the gilt market is needed, and that the Bank and the Debt Management Office should publish more frequent updates on gilt market participant demand and sentiment.

QE generated significant profits for the Treasury up until 2022, but since then QE and QT have begun incurring a significant loss that is being indemnified by quarterly transfers from the Treasury. Notwithstanding the operational independence of the monetary policy, it strikes us as highly anomalous that decisions have been and are being taken concerning huge sums of public money without any regard to the usual value-for-money requirements. Moreover, the regular indemnity payments count towards the Government’s fiscal rules, with worrying implications for public spending, taxation and borrowing, and for the operational independence of monetary policy. We recommend:

  • the Bank and Treasury explore how value-for-money criteria and the spending power of the Treasury could be included in decisions about the ongoing pace and timing of QT;
  • the Treasury clarify whether the Chancellor’s authorisation of changes to the indemnity involves a substantial decision or is only a formal endorsement of the Bank’s decision;
  • the Bank and Treasury clarify the future arrangements for the steady-state level of reserves on the Bank’s balance sheet and the implications for the Bank’s profits and losses and the Treasury indemnity;
  • the Treasury should examine whether it is appropriate that ongoing indemnity payments are included in the debt targeted by the fiscal rules.

We recognise that QE and QT are processes already well in train, and it may not be possible to make large changes to the indemnity and remittance arrangements. But given what we now know, there is no reason to think that the arrangements devised more than a decade ago are the most suitable available. Should QE take place again, we recommend that it not proceed automatically under the existing arrangements. In particular:

  • lessons should be learned about the effectiveness of each round of QE over 2009 to 2021 and how it might be used more selectively in future, partly with reference to the fiscal implications;
  • the way in which profits and losses are accounted for should be revisited, in particular the 2012 decision to remit cashflows quarterly between the Bank and the Treasury.