In a report on QT, the committee found that, despite the strategic framework and rationale for the programme being “broadly reasonable”, the BoE is “uncertain” about the impact it may have on the macroeconomic and money supply space.
The report stated the committee is “concerned that the Bank is taking a ‘leap in the dark’ by embarking on a major operation without specifically and separately tracking its effects”.
The central bank expected QT to have a “small impact” on the economy in the short term, but the report also noted the BoE has been “candid that the likely macroeconomic impacts of QT are not well understood”.
BoE’s Breeden: ‘No evidence’ quantitative tightening poses risk to financial stability
Additionally, the committee argued quantitative tightening is an “untested intervention” in the recent economic backdrop, where the gilt market is also faced with an “unusually high” rate of conventional gilt issuance.
Although there has been no evidence that QT is having an impact on financial stability, a point also raised by deputy governor for financial stability Sarah Breeden at a Treasury Select Committee hearing in January; the report urged the creation of a contingency plan following the rapid deterioration of the gilt market in March 2020 and September 2022.
Value for money was another issue raised within the report, with the committee noting that, while quantitative easing had generated “significant profits” for the Treasury up until 2022, QT has incurred a “significant loss” and is being “indemnified” by the Treasury via quarterly transfers.
Potential losses from the QT programme have been estimated to be as high as £130bn, which could significantly impact public spending, the report argued.
The committee stated: “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.”
OECD projects UK to suffer highest inflation rate among G7 economies
Committee members have also questioned the role of the chancellor in overseeing the changes in size of the facility which holds government bonds purchased through QE and are now being sold under QT.
As such, they asked for greater clarity on whether the central bank’s decisions are “waved through” by the government or if the chancellor making an active decision on the matter.
The report also provided a series of recommendations for the BoE on its QT programme.
These included a value-for-money assessment on the pace and timing of QT; how QE could be used “more selectively” in the future; and an evaluation of the impacts of QT on the wider economy alongside the updating of modelling and forecasting tools to mirror this.
Both the central bank and the committee have also agreed to the creation of a backstop facility to allow the BoE to react to any future unplanned market disruption, with some members recommending a further contingency to suspend QT and/or to restart gilt purchases in the event of a large financial shock.
Bank of England’s Bailey: QT not to blame for banking turmoil
Harriett Baldwin, chair of the Treasury Committee, said: “It has become clear during the course of this inquiry that the decision to undertake a period of quantitative tightening is a leap in the dark for the UK economy.
“I recognise that the Bank of England does not have a crystal ball and is in uncharted waters, but more can be done to develop forecasting and modelling tools which can help us understand the risks and benefits of QT.
“With more public money at stake than was ever envisaged when QE was launched, the Bank and Treasury should take our advice and explore whether the usual value-for-money considerations can be factored in when deciding the pace and level of QT they implement.”
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