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Bank of England's Bailey says QE bond sales should precede rate rises
[LONDON] Bank of England Governor Andrew Bailey said on Monday that the central bank should start to sell government bonds back to the market before it raises interest rates significantly, which would represent a reversal of long-standing BoE policy.
Any bond sales are some way off, as just last week the BoE increased its bond purchase target by 100 billion pounds (S$172.8 billion) to 745 billion pounds to support the economy through the unprecedented slump caused by COVID-19.
But Mr Bailey said this level of central bank asset purchases, known as quantitative easing (QE), "shouldn't always be taken for granted" and stressed the central bank's independence from government.
"When the time comes to withdraw monetary stimulus, in my opinion it may be better to consider adjusting the level of reserves first without waiting to raise interest rates on a sustained basis," he wrote in an article for Bloomberg.
Under previous governor Mark Carney, the BoE said it would raise interest rates materially before starting to sell past asset purchases back to the market, as it viewed interest rates as a nimbler policy tool.
But since the 2008-09 financial crisis the BoE has never had the opportunity to raise interest rates significantly, and Mr Bailey said he did not want big central bank holdings of government debt to become a permanent feature.
"Elevated balance sheets could limit the room for manoeuvre in future emergencies," he said.
Mr Bailey's views are personal, though they are likely to carry weight with the other members of the BoE's Monetary Policy Committee who would need to approve future bond sales.
There was little immediate market impact from the news, reflecting how Britain's recovery from the massive economic shock of coronavirus will be the main driver of BoE policy.
George Buckley, an economist at Nomura, said Mr Bailey's aim might be to reverse some gilt purchases undertaken to calm markets in recent months, without having as big an impact on the general public as an increase in interest rates would.
"This programme, because it is designed to have an impact on what is potentially quite a short-term event ... probably what they're thinking is they might not need to keep this stuff in place," Mr Buckley said.
The announcement also took the BoE a step closer to a policy of yield curve control, where the central bank aims to keep bond yields around a certain level, rather than focus on very short-term interest rates affected by Bank Rate, he added.
Britain's central bank has also been keen to dispel the idea that it is engaged in unconditional monetary financing, rather than tailoring gilt purchases to ensure market stability and to keep inflation close to its 2 per cent target.
Later on Monday, in an interview with Sky News, Mr Bailey said Britain's government might have struggled to raise money from bond markets if the BoE had not intervened with its asset purchases to calm financial turmoil in March.
"I think the prospects would have been very bad. It would have been very serious," he said.
But he said it was not his job to ensure the government could borrow, come what may.
BoE purchases of British public debt since the start of the crisis have outstripped even the record increase in government borrowing needs, prompting some suggestions - rejected by the BoE - that it is underwriting the government's spending.
"The fact that the predominant borrowers in this emergency are governments - reflecting the essential role of the state in such a crisis - makes no difference to the underlying economics or the importance of keeping borrowing costs in line with objectives," Mr Bailey said.
"Far from calling into question or suspending that independence, this episode has called for a response from central banks that's only possible because their independence gives them the freedom to operate."