BoE: Greater motivation for tightening policy by unwinding QE rather than raising rates

In a recently published research paper, the Bank of England noted that there may be a greater motivation for tightening monetary policy by unwinding the QE rather than raising the policy rate when – and only when – the time comes for the stance of policy to start normalising.

Additional takeaways as summarized by Reuters

"QE has successfully lowered long-term interest rates, providing required monetary stimulus."

"Too soon to draw firm conclusions on the efficacy of the policy response to COVID and the role of the central bank balance sheet."

"Decisive QE programmes may be particularly effective in times of market dysfunction."

"Rapid pace of asset purchases may also enhance QE effectiveness."

"Judgements on the appropriate policy mix when – and only when – the time comes for policy normalisation may be more nuanced than had been previously thought."

"Highly desirable for the operational framework to support countercyclical movements in the balance sheet, for both monetary policy and financial stability purposes."

"Other things equal, a reduction in the stock of assets held on the balance sheet provides more space for large and rapid purchase programmes in the future."

"While there may be theoretical cases in which preservation of future QE policy space could influence the overall stance of monetary policy, they may be unlikely to prevail in practice."

"Preservation of future QE policy space may only become an issue if the central bank owns an overwhelming share of the stock of gilts."

"All else equal, and depending on future MPC decisions on QE unwind, the bank’s future steady-state balance sheet would very likely be smaller under this framework than it is today."

Market reaction

The GBP/USD pair retreated below 1.3300 but doesn't seem to be having a tough time clinging to its strong daily gains. As of writing, the pair was up 0.66% on the day at 1.3285.