BoE; QE ends wants a substantial but “lean” balance sheet needed

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Once the 895-billion-pound asset purchase programme is completed, the Bank of England plans to have a substantial but considerably reduced balance sheet and will take efforts to ensure this does not push up short-term rates. Finance director at the Bank of England Andrew Hauser said that the market should not anticipate the central bank to act as forcefully as it did in March 2020, when the concern of a COVID-10 epidemic drove up bond yields.

Recently, the Bank of England (BoE) declared that it will no longer reinvest maturing bond proceeds from its quantitative easing programme once interest rates were hiked to 0.5 percent. Outright sales could be considered after the BoE’s main interest rate is hiked to 1%. Governor Andrew Bailey told MPs last week that he did not expect this policy to raise bond yields significantly, and that it was designed to ensure the Bank of England had enough room to buy assets in the event of a future crisis.

In a lecture to the International Finance and Banking Society, Hauser stated that the size of the BoE’s balance sheet – which includes QE purchases, banknotes in circulation, and other market activities – would fluctuate as the BoE smoothed out the economic cycle. BoE’s balance sheet would shrink overall, but still be greater than it was previously, he said.

“We expect to adopt a market-led approach, in which we allow reserves to fall as QE assets roll off, but stand ready to replace any demand shortfall that might arise through shorter term open market operations,” he said in a speech published on Monday.

“This should allow us to run a ‘lean’ balance sheet – giving markets scope to function – without suffering excessive upward pressure on short-term rates.” Hauser also said the scale of the BoE’s intervention in March 2020 – when it restarted bond purchases to tackle market dysfunction as well as broader economic weakness caused by the pandemic – was not intended to set a precedent.

“Market participants should therefore build stronger self-insurance, and expect greater regulatory scrutiny, in exchange for central bank access,” he said.