A growing chorus of financial commentators and economists is calling on the Bank of England to immediately halt its active quantitative tightening (QT) programme. The argument posits that ceasing the active sale of government bonds, known as gilts, would not equate to a loosening of monetary policy but would instead serve to remove what they describe as 'avoidable pressure' on the UK's gilt market.
Quantitative tightening is the process by which a central bank reduces the size of its balance sheet, typically by selling government bonds it acquired during periods of quantitative easing (QE). The Bank of England embarked on QE to stimulate the economy following the 2008 financial crisis and again during the COVID-19 pandemic. Its subsequent QT programme involves actively selling these gilts back into the market, alongside allowing some to mature without reinvestment.
Critics of the current approach contend that the active selling component of QT is an unnecessary drain on market liquidity, particularly at a time when the UK economy faces various headwinds. They suggest that allowing gilts to mature naturally would be a less disruptive way to shrink the balance sheet, achieving the same long-term goal without adding stress to bond yields and borrowing costs.
The distinction between ending active QT and monetary loosening is crucial to the proponents of this view. Monetary loosening typically refers to cutting interest rates or initiating new QE programmes to inject money into the economy. Stopping active gilt sales, they argue, would simply remove a source of additional supply in the market, rather than actively increasing the money supply or making borrowing cheaper through policy rate cuts.
The implications for the UK government's borrowing costs are significant. Increased supply of gilts from the Bank of England's sales can push down gilt prices and consequently raise their yields, making it more expensive for the Treasury to finance public spending and debt. Reducing this active pressure could, in theory, help stabilise or even lower long-term borrowing costs.
This debate comes at a sensitive time for the UK economy, with inflation still a concern and the Bank of England carefully managing its approach to interest rates. Any change to its balance sheet policy would be closely scrutinised for its potential impact on financial stability and the broader economic outlook.
Source: CityAM