The Bank of England (BOE) is considering a significant shift in its monetary policy strategy by potentially selling all UK government bonds acquired under its quantitative easing (QE) program. This approach marks a departure from strategies employed by other major central banks, such as the US Federal Reserve. BOE Deputy Governor Dave Ramsden highlighted the possibility of reducing the QE portfolio, which at its peak reached £895 billion, down to zero. This move is aimed at better preparing for future crises by utilizing different liquidity instruments to meet the demands for financial stability.
Ramsden’s statements reflect the BOE’s proactive stance on unwinding the stimulus measures that have been in place for over a decade. Unlike the Federal Reserve, which aims to maintain a QE portfolio to support an “ample” level of reserves, the BOE is willing to fully unwind its asset purchase facility if deemed necessary for policy reasons. This difference underscores the BOE’s readiness to adopt a more aggressive approach to normalize its balance sheet, emphasizing the bank’s independence in policy judgment despite potential financial implications for public finances.
The Treasury is currently underwriting losses from asset sales, with the program initially generating £124 billion in profit, all spent by the government. Since October 2022, the QE program has incurred £49.4 billion in losses, covered by the state, with potential net losses nearing £100 billion over the QE’s lifetime. Ramsden’s comments also touched on inflation concerns and the need to maintain interest rates at levels that address persistent inflationary pressures, despite recent declines in headline inflation rates.
The BOE’s consideration to fully divest its QE holdings signifies a commitment to ensuring financial stability and the ability to respond to future economic shocks. This strategy also reflects a broader perspective on managing the central bank’s balance sheet and liquidity provisions in a post-QE environment, underscoring the importance of flexibility and adaptability in monetary policy frameworks.
