The House of Commons Treasury Committee published a report on quantitative tightening this morning. It's 40 pages, and whilst I have scan read it all, please read this as an initial reaction.
The Bank of England claimed to the committee that:
- They are only doing quantitative tightening to tighten their balance sheet.
- They claim that this is necessary to create headroom for more quantitative easing in the future.
- They admit that the whole quantitative easing process cannot be reversed.
- They claim that what they are doing now is not disrupting markets.
- They claim that the quantitative tightening that they are doing now is having no impact on interest rates. It was claimed to only be a technical exercise.
- They claim that quantitative tightening is not impacting the economy.
The Committee has been far too trusting of the Bank, especially in the light of evidence given that:
- Quantitative tightening has impacted interest rates, having the same effect as at least another half per cent increase in rates, which I think is an underestimate.
- Quantitative tightening has impacted markets when this year total gilt sales will be £277 billion but would be no more than £137 billion without QT. In other words, QT sales exceed those needed to fund the government deficit.
- There is evidence that this is impacting government decision-making, not least because of the impact of the supposed losses on quantitative tightening bond sales that the Bank of England appears to be so anxious to generate, which are bringing pressure to bear on the Treasury.
There is no mention in the report that I have so far seen of:
- The fact that quantitative tightening was wholly avoidable, although it is noted that the Bank of England alone is doing it in the way that it is at present.
- That the supposed losses from quantitative tightening were entirely avoidable because there was literally no reason at all for the binds in question to be sold at a time when their value was falling, entirely as a result of action by the Bank of England to increase interest rates which inevitably reduced those prices.
My reaction is:
- The Bank of England is not telling the truth.
- Quantitative tightening began in September 2022 (causing an immediate financial crisis as a result that was incorrectly blamed on Liz Truss and Kwasi Kwarteng) and had to be temporarily reversed because it was so ill-conceived.
- Active quantitative tightening, involving the sale of bonds by the Bank of England rather than a failure to reinvest the proceeds of redemptions, was begun to actively support higher interest rates and was an explicit part of the Bank of England's monetary policy programme to artificially inflate interest rates in this country.
- Quantitative tightening has had a much bigger impact on interest rates than the committee of those giving evidence to it suggest in that case because rates could not be sustained at 5.25%, or the planned continuing exceptional positive rate intended for the rest of this year and beyond but for it.
- The cost of those interest rates has, in that case, to explicitly include the losses incurred by the Bank of England in pursuit of this reckless and irresponsible policy.
- Taking £140 billion out of financial markets wholly unnecessarily in a year is not financially neutral. It has two effects. First, it clearly distorts markets. Second, it very obviously distorts government decision-making by increasing the cost of capital. The whole £28 billion green investment debacle from Labour need not have happened if the quantitative tightening programme was not being pursued, with that programme being five times bigger than the sum Labour wants to raise.
- As a result, everything that the Bank claims about this programme, except that additional reserves will need to remain in place, is not true: it is an explicitly and deeply political programme on their part to actively alter the economic environment of the UK as a whole, creating in the process a deliberately hostile market for real government investment at cost to us all.
I wish the Committee had been considerably more analytical and cynical in their approach to the evidence from the Bank of England. They are not convinced by the Bank's evidence: the Committee should have realised that they were having the wool very deliberately pulled over their eyes. The Committees conclusions are:
- 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.
They remain too trusting of the Bank. And that worries me: they are not to be trusted on this issue.
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“They claim that this is necessary to create headroom for more quantitative easing in the future.”
At root the same old lack of curiosity and/or deliberate mendacity – “the state has no money of its own!”
The consequence of this is all the UK’s political parties currently being “paralysed” parties. Here’s just a few outcomes of this paralysis culled from today’s Guardian:-
https://www.theguardian.com/society/2024/feb/07/hundreds-of-thousands-of-uk-cancer-patients-forced-to-pay-for-private-treatment
https://www.theguardian.com/society/2024/feb/07/childrens-emergency-mental-health-referrals-in-england-soar-by-53
It seems to me that the fear mongers have won.
Yet no-one has actually told us who or what we should be scared of?
Who owns ‘the debt’ they keep telling us about?
Why didnt they invite other analysts to counter balance and/or assess the BoE view?
Are there any other citeable sources for the various points in your refutation? You make it sound so clear and obvious – surely some others have made some/all of these points?
Not many have
Groupthink is very pervasive
The evidence is that they asked the truly dreadful Andtrew Sentance
At root there is a lack of curiosity amongst both voters and politicians how economics works and in particular the way a monetary system needs to work. This lack undermines democracy which is why we see the appalling austerity in this country implemented by both the Conservative, Labour and LibDem parties!
I am neither ‘for’ or ‘against’ QT (or QE)…. but I am ‘for’ a sensible level of rates for the real economy.
At the margin, QT is raising gilt yields to a level that they would not be at without it…. but the biggest driver is Base Rates and expectations of where Base Rates will go.
Imagine for a moment you were one of the MPC members that voted for a rate hike. You would look at 5 year gilt yields (currently sub-4%) and say “QT – bring it on! Gilt yields need to be higher”.
So, in may ways QT is a rational corollary to Base rate policy…. it is Base Rate that is wrong.
On a technical note, QT does reduce CBRA balances…. interest will, in effect, be paid at the level of gilt yields rather than Base Rate. I wonder whether the keenness on QT is to reduce these balances and head off questions about remuneration of Reserves before they get too loud?
Maybe to your last…
But there are better ways to achieve that without incurring a realised £130 billion loss
Is it a “loss”?… they may have “bought high, sold low” ….. but who did they buy from? BoE/APF/HMT are all the same family.
P+L from QE/QT is pretty irrelevant – it is ALL about getting the right level of rates for the country.
They bought high from the market and sold low to it
That’s a real loss, and wholly unnecessarily realised at the wrong time
In economic terms, they bought from themselves… give or take a 1/32 or two scalped by the market makers. I think focussing on losses misses the point… it is ALL about getting the correct level of interest rates for the economy.
Agreed…..
But they did not necessarily buy bonds just issued so your claim does not quite stack
Did they buy a whole lot from the market though ie the secondary market as opposed to the primary ie the Treasury itself? I remember reading (and it was discussed here) Bailey explaining in the Guardian IIRC the difference between the two and how because of the Covid emergency the BofE was practicing DMF. What that means then is there were a lot of interdepartmental transfers of assets, no matter that some might be popularly referred to as money and others as gilts. I don’t have figures handy for the proportion between the two markets… I note though, in fact it leaps out, in the press release on the Committee Report it says “In its report, the Committee expresses concern about the uncertainty surrounding potential lifetime losses of £130 billion which could have huge implications for public spending.”
To even my uneducated eyes, this positively howls ‘Sabotage!’ and suggests this is being done by Bailey quite deliberately to hamstring the incoming Labour govt, in appearance at least.
The answer is, a mix. That is the only fair thing to say without doing a lot of research.
So in theory then Bailey could be selling gilts purchased originally by the BofE direct from the Treasury into the secondary markets at a loss (if, given the real nature of these transfers, it could properly be described as such) and not just doing this with those bonds purchased from the secondary markets… there ought to be some sort of recognition of and formal punishment for this, surely?
Further to my earlier comment, it occurs maybe Bailey isn’t trying to sabotage any incoming Labour govt but rather, after discussion and agreement with them, he’s giving them evidence they can point to and use as an excuse for letting the economy slide further into oblivion, this to suit their financial masters who, I guess, would love to see the rest of us crawling hungry and desperate in the dirt while they soar above in their flying cities. I’m evoking Zardoz deliberately here – and look how well that turned out for the supposed elites… if anybody wants me, I’m saddling up!
To your first paragraph the answer is yes, and yes.
It doesn’t really matter in economic terms what gilts they bought or are now selling.
When they bought they created money and paid base rate on it (ie. virtually zero) and (effectively) earned the yield on the gilt.
Now they are sell they are effectively paying the yield on the gilt instead of paying base rate on the reserves that the gilt sale has drained.
We don’t really know what losses were incurred because we don’t know at what yields gilt issuance would have happened at without QE… or where gilt issuance would clear the market without QT.
A toy example might help…
Assume no QE/QT
During Covid – issue 100 gilts at 3%; post covid – issue 100 gilts at 4%. Net 200 gilts issued at average 3.5%
With QE
During Covid – issue 100 gilts and buy (QE) 50 gilts at 2%; post covid – issue 100 gilts and sell 50 gilts (QT) at 5%. Net 200 gilts issued at average 3.5%
In this example the QE/QT process has not altered the net cost of process.
Point 1 – we don’t know what the losses are
Point 2 – it is all about trying to target gilt yields at the right level and we should NOT get caught up in the P+L issues of QT.
As counter arguments go, I admit they’re pretty good
Clive, I think I see where you are going; but you make QT sound a little like corporate share buybacks. In the US in recent years share buybacks have run at up to around $1Trn a year; and typically these are executed at a share price peak (far above issue price). It is has also been done to exploit tax-breaks, and it boosts share prices. There is no substantive economic benefit to the firm, because there is no investment in anything; it is just gaming the formal financial reporting. Indeed the Harvard Business Review (2020) titled its critique of buybacks “Why Stock Buybacks Are Dangerous for the Economy”.
I am speculating that QT is of a similar order; the BoE is gaming the system. I would be very interested in your informed response to my confessedly rough, intuitive hypothesis (in short? I smell a rat in the BoE thinking).
John, my example is not designed to be realistic – merely to show that we cannot know what the “loss” was as don’t know where gilts would have traded without QE and where they would trade now without QT.
You are certainly correct when you suggest that the process has cost the government money…..but how much? Who knows.
However, open market operations – both “normal” and QE and QT are not about P+L – they are about guiding interest rates to where they should be. This is the BIG error from the BoE, not having rates where the need to be.
Agree with the last
While we are on this subject, can I ask a question about CBRAs? One of the suggestions for reducing interest payments on government debt was that interest payments on CBRAs should be dropped. The Bank of England argues that interest has to be paid on CBRAs because “Quantitative Easing also creates an accompanying liability for the bank in the form of the pension fund’s deposit, which the bank will itself typically have to pay interest on.”
See Money Creation in the Modern Economy in the section titled “Why the extra reserves are not ‘free money’ for banks”
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy
I would have thought those deposits will not be held for very long as the proceeds of gilt sales would be invested elsewhere. In addition, is it the Bank’s job to pay the commercial banks interest on deposits? If interest payments are too high, the commercial banks can reduce rates, isn’t that how competition is supposed to work?
Thanks
The argument is utterly spurious
Thank you and well said, Richard.
From 2012 – 4, I worked at the buy side trade association and compiled a monthly report on credit conditions, based on qualitative and quantitative input from bond investors, for the chief economist, then Haldane, and MPC.
One day, I got a call from one of the junior officials asking if I could tone it down a bit. This came from Carney, not Haldane, as it suggested inflation and, in particular, the impact on earnings.
I chuckled at the other end as Carney was paid twice his predecessor, due to the cost of living in London as opposed to Toronto, and a non dom even though he lived in Hampstead and worked on Threadneedle Street. If inflation was a problem for Carney, why was it not a problem for lesser mortals?
The Bank of England is in deep trouble. It has lost the confidence of the Country. Our present government doesn’t want it to fail as their daft remit is half the cause. It makes them ‘fight inflation at all times to achieve a symmetric target of 2%’, no matter what caused the inflation. The reason inflation rose in December was purely the Government’s hike in duty on alcohol and tobacco – and that caused two members of the MPV to want to raise interest rates! Utter lunacy – unless there was a hidden agenda…
The Government claims the Bank and its MPC are fully independent which allows them to blame the Bank for tanking the economy and raising unemployment yet claim credit when inflation falls.
QE began in Japan in 1999 (so much for Japan being an ‘outlier’). According to Haldane and the BoE: “Central bank balance sheet expansions for monetary policy purposes became more common after the global financial crisis. Around the world, central banks loosened monetary policy to offset the collapse in demand, with short-term interest rates cut to close to zero in the US, UK and euro area. Each of these central banks, as well as the Bank of Japan, subsequently significantly expanded their balance sheets” (Haldane, et al., “Staff Working Paper No. 624
QE: the story so far”; BoE, 2016, p.5). And: “It is only during this century, and in particular since the global financial crisis, that we have seen central bank balance sheet expansions taking on an explicit monetary policy objective. Since 2007-8, as a number of countries approached the effective lower bound for official interest rates, central banks made outright purchases of securities funded by the creation of central bank reserves – Quantitative Easing or QE. This has led to a substantial increase in central banks’ balance sheets, both relative to nominal GDP and to the stock of government debt outstanding” (BoE, SWP No.624, p.1).
Expanded balance sheets in their proper historical perspective, however are the norm of British central banking history. It is therefore not the exception for the central bank to be faced with an expanded balance sheet – it is, and should be the essence of their role, as lender and dealer of last resort, throughout the BoE’s 300 plus year history: “For example, in the early 18th century, the Bank ended up owning nearly all of UK government debt” (BoE, SWP No.624, p.3). Britain was constantly facing war or crisis in some form or other (from slavery emancipation to bank collapse, or even world war); notably since the BoE was founded in 1694, specifically to fund war (almost all any government of the time expended resources to do); and later to fund an expanding Empire or industrialisation though two world wars, and into the 21st century GFC.
The idea central bank expanded balance sheets is an outlier activity, or an anomaly, is an ideological illusion first routed by the South Sea Bubble, and only resuscitated by neoliberalism late in the 20th century. The resulting detritus to which both our infrastructure and wellbeing has been reduced by neoliberalism in order to try to shrink the balance sheet (and fail in the attempt, in part because the anomalous events keep recurring, the task is too difficult, and is fraught with serious adverse consequences), is plain to see.
When we turn to the current explanation of QE we find a smoothly disguised elision of its significance, by the BoE compared with Haldane’s 2016 Working Paper: “QE is one of two tools we can use to change interest rates. The other is Bank Rate, which historically has been our most important tool.
We first began using QE in March 2009 in response to the Global Financial Crisis. At that time Bank Rate was already very low. In fact, it couldn’t be lowered any further at that point. So we needed another way to lower interest rates, encourage spending in the economy, and meet our inflation target.
QE involves us buying bonds to push up their prices and bring down long-term interest rates. In turn, that increases how much people spend overall which puts upward pressure on the prices of goods and services” (BoE, ‘Quantitative Easing’, latest update, 31st January, 2023).
Notice that the original real crisis-inflected economic purpose of QE has now almost disappeared, for a comfortable, inward-looking, technicians discussion of the means, over the ends. In consequence the improvisation required of central bankers in resorting to QE in 2009, and its rushed application, is no longer adequately reflected in the smooth ex-post rationalisation the BoE has now adopted to explain the effectiveness of their original crude handiwork, necessitated by events, and sent out unknowing into the world.
They are busy now, marking their own homework.
You are right
When Haldane writes: “At that time Bank Rate was already very low. In fact, it couldn’t be lowered any further at that point. So we needed another way to lower interest rates, encourage spending in the economy, and meet our inflation target”, I suspect the BoE was rattled because rates at the lower bound disarms the power of the BoE to act affectively in monetary policy. QE was not a solution on which they care to rely. They prefer a single-shot weapon.
This places the BoE drive to increase interest rates in a fresh light. The appeal to inflation as the reason to raise interest rates is the conventional argument, but it is a thin and implausible line to take (because the actual inflation suffered in the UK was imported, and the BoE had no control whatsoever over it, by any means at the Bank’s disposal; the Bank was thus effectively reduced to the status of onlooker, both over the rise in inflation suffered and, largely; the fall, which was predictable).
Having turned to QE, which the BoE does not understand, has little experience of handling, and does not know the consequences, the Bank is anxious to return as quickly as possible to the status quo-ante; using a single tool it understands how to use, the interest rate: this is its comfort zone – very narrow, and in detail it is a central banker and dealer’s area of knowledge that from their perspective is reassuringly recondite; the public’s understanding is low, and reliance on the central banker’s authority, high – the ‘white coat’ phenomenon long understood by psychologists.
Therefore, I hypothesise that beyond the ‘inflation excuse’, the BoE is anxious to slay the QE dragon it does not fully understand and return permanently to reliance on its single-shot musket of the sacred “interest rate”; but can only do this by ensuring interest rates recover to levels well above the lower bound. What matters to the BoE central bankers is a world that fits in with their very, very narrow area of expertise.
The World, however is another country, operating to its own rules; as we find, always to the central bankers’ dismay and incredulity.
But all of the makes the caim that QT is econ omically neutral absurd
How can the inverse of active poilcy be neutral?
Sorry, Richard I simply do not understand your comment/question. I am not suggesting QT is economically neutral; I am drawing attention to the purposes of the BoE in its interest rate policy and ITS peculiar perception of QE. It wasn’t a comment specifically about the efficacy of QE at all.
The BoE is claiming QT is neutral, nit you John
You are showing the opposite