The Bank of England’s balance sheet should fall to around half its current size when quantitative easing (QE) is finally unwound, according to the executive director for markets.
While there’s no sign that the bond-purchase programme will be pared back any time soon, a new BOE Discussion Paper on quantitative tightening suggests that the “steady state” balance sheet should ultimately be around $341 billion to 375 billion pounds, Andrew Hauser said.
That’s still large by historical standards, as the BOE has a bigger remit than before to safeguard the financial system, he said, but it is narrower than previously indicated.
“Big balance sheets are here to stay,” Hauser said.
“We have a bigger responsibility than we did to provide liquidity to the system, in good times and bad, and to a wider set of organisations, to maintain financial stability.”
With its bond-buying plan in the aftermath of the first financial crisis, and then the Brexit referendum, the BOE’s balance sheet has risen more than sevenfold to around 30 percent
Policy makers have
indicated there will only start unwinding purchases once interest rates reach 1.5 percent — and financial markets don’t see rates hitting that level for at least five years.
Moreover, the proposed size of a post-QT balance sheet “gives no indication about
the extent of QE sales,” Hauser said.
He added that while other central banks may be able to achieve QT through not reinvesting as their holdings mature, the UK’s longer-dated debt profile means the BOE may be more reliant on actual sales.