and the Bank of England's
Waiting for the exit: QT long-term
balance sheet
Speech given by
Andrew Hauser, Executive Director, Markets
At the European Bank for Reconstruction and Development, London, and hosted by the
Association for Financial Markets in Europe (AFME), International Swaps and Derivatives
Association (ISDA) & International Capital Market Association (ICMA)
17 July 2019
I am grateful to Saba Alam, Nicholas Butt, Amber Evans, Rafael Kinston, Nick McLaren, Dave
Ramsden, James Rapa, Rhys Phillips, Tom Smith and Tim Taylor for their assistance, guidance and
advice in preparing this speech.
1
All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx
Introduction
For such an apparently arcane topic, the size and composition of central bank balance sheets can provoke
passionate reactions.
'Too large', and central banks may find themselves accused of usurping the role of financial markets,
harming innovation and inducing imprudent behaviour; fuzzying the boundary between monetary and fiscal
providing a 'dangerous temptation for ... the political
policy, class'1; or giving unmerited financial rewards to
reserves holders.2
'Too small', and central banks may be criticised for being asleep at the wheel3 at times of crisis; failing to
play their part in ensuring an adequate supply of risk-free assets in the economy to maintain financial stability
during peacetime4; or hampering the effectiveness of monetary policy transmission.5
Chart 1: Central bank balance sheets compared
banks' published data, IMF
Source: Individual central
The Bank of England has found itself on both ends of this debate in the past 10-15 years. Before the
financial crisis, our balance sheet was modest, at 4% of GDP. Since then, and in direct response to the
crisis, that figure has risen to around 30%: a more than seven-fold increase. Other regions have seen
by the UK's own standards this is truly
similar, or in some cases much larger, expansions (Chart 1). But
exceptional. You have to go back to the end of World War 2 or the early 18th century to find anything even
approaching the same highs (Chart 2).
1
Kevin Warsh, quoted in the FT, 7.5.17: https://www.ft.com/content/45303028-3280-11e7-bce4-9023f8c0fd2e
2
See for instance https://www.cato.org/blog/strange-official-economics-interest-excess-reserves
3
https://www.thetimes.co.uk/article/we-were-not-asleep-at-the-wheel-bank-of-england-managers-tell-angry-mps-6pc7bnr56lf
4
https://scholar.harvard.edu/stein/publications/federal-reserves-balance-sheet-financial-stability-tool
5
https://www.brookings.edu/blog/ben-bernanke/2016/09/02/should-the-fed-keep-its-balance-sheet-large/
2
All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx
Bank of England's balance sheet as a share of GDP
Chart 2: The
Source: Bank of England, available at: https://www.bankofengland.co.uk/statistics/research-datasets
Where is this all going? At one level the answer to that is simple: for the foreseeable future, the path of the
Bank's balance sheet will
be shaped by the decisions of the Monetary Policy Committee (MPC) in pursuit of
the inflation target given to it by Government. Whether that involves further expansion of the balance sheet,
Quantitative Tightening or
or a return to less exceptional levels (so-called 'QT'), we on the Bank executive
need to be ready to implement those decisions.
My focus today is squarely on the latter: how we plan to implement monetary policy during QT, and the likely
market expectations don't
size of our balance sheet in the medium term. Of course, point to QT starting any
time soon. But those views can change rapidly. And experience from the United States and elsewhere
suggests that early, clear communication about the target end-state can help stabilise expectations and
increase the effectiveness of normalisation when it comes. For that reason, we launched a Discussion
Paper6 last year to expose our vision of the medium-term goal to challenge and feedback. We promised to
- what
share our findings from that work7 and that's I aim to do today.
To jump to the punchline, I have four key messages. The first is that, judged by historical standards, big
That's not a prediction that
balance sheets are here to stay. QE will never unwind: it will. But we have a
bigger responsibility than we did to provide liquidity to the system, in good times and bad, and to a wider set
And that's not going away. Point two is that big doesn't mean
of organisations, to maintain financial stability.
- so the balance sheet will eventually shrink from where it is today. That's something the Bank has
outsized
been stressing for some time. But the Discussion Paper has allowed us to put a tighter range on that
forecast, and suggests our liabilities probably only need to be half the size they are today to carry out our
- we can't
mission once QT is underway. Knowing that is progress but point three is get too comfortable,
6
https://www.bankofengland.co.uk/-/media/boe/files/paper/2018/boe-future-balance-sheet-and-framework-for-controlling-interest-rates
7https://www.bankofengland.co.uk/-/media/boe/files/speech/2018/finding-the-right-balance-speech-by-dave-ramsden.pdf
3
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because the margin of uncertainty around that estimate is high. Neither we nor the firms who use our
liquidity really know what their demand will be when conditions normalise. And that uncertainty could pose
challenges as we exit, as the recent experience of QT in the United States has arguably shown. The final
message, therefore, is that we must have as our ultimate goal an end-state framework that can cope with
that ambiguity without shaking itself, and us, to bits. We think we have an approach that can meet that
challenge - but we need to keep testing that, with your help.
The Bank of England balance sheet: theory and practice
To develop these points, let me start with some basics. The Bank of England's balance sheet is special for
- and that's the nature of our liabilities. -
one key reason Central bank money whether banknotes or central
bank 'reserves' (deposits held -
with us by financial institutions) provides the ultimate means of settlement
for all sterling payments in the economy. And that gives our balance sheet a central role in supporting
monetary and financial stability:
- It supports financial stability by providing the reserves banks need to make payments to each other
and help insure against bank runs;8 and
-
- It underpins monetary stability because the interest rate we pay on reserves known as Bank Rate
-
influences interest rates throughout the economy; and we can use reserves to conduct less
conventional monetary policy, include asset purchases and term lending.
This last point has of course been the primary driver of our balance sheet expansion over the past decade.
Bank's assets
Three quarters of the is in the form of a loan to the Asset Purchase Facility backing £435bn of
gilt holdings and £10bn of corporate bonds, while another £127bn has been lent to banks under the
Term Funding Scheme (Chart 3).9 A further £13bn of liquidity has been extended under the so-called
'Index Linked Term Repo' facility, part of the Sterling Monetary Framework (SMF).
Nearly all of that activity has been financed by an increase in central bank reserves (Chart 4).
8
Alongside meeting regulatory liquidity requirements, and deposit insurance.
9
https://www.bankofengland.co.uk/markets/funding-for-lending-and-other-market-operations
4
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Chart 3: Bank of England assets Chart 4: Bank of England liabilities
Source: Bank of England
Note to Charts 3-4: The Special Liquidity and Funding for Lending Schemes (SLS and FLS respectively) were funded through asset
swaps rather than reserves, so were not on balance sheet. They are nevertheless shown for context.
Although created to finance asset purchases and loans, this increase in reserves supply has also allowed us
to (more than) meet a sharp pickup in the demand for reserves as a safe asset, underpinning financial
stability. That higher demand comes from two main sources:
First, the number of firms with access to the Bank's balance sheet through the SMF
- has increased
ten-fold, from 17 in 2005 to over 200 today.10 That follows a deliberate push on our part to expand
part of ensuring the Bank is 'open for
access to smaller banks, CCPs and broker-dealers as
business' and responsive to changing market needs.
SMF members' target
- Second, there has been a sharp rise in liquidity holdings, reflecting both the
regulatory requirements, and firms' wish to hold buffers well
material strengthening in post-crisis
above those minima. To give a sense of the scale of this effect, major UK banks now hold more
-
than £1 trillion of assets classed as liquid for regulatory purposes more than four times higher than
pre-crisis. A quarter of that is held as central bank reserves.
firms' financial stability needs,
In addition to implementing unconventional monetary policy and meeting the
Bank's balance sheet operations have also
delivered effective interest rate control. The key to this is that
there is an abundance of reserves, all remunerated at Bank Rate. The excess of reserves pushes down on
overnight markets rates, but they are prevented from falling much below a floor of Bank Rate by the fact that
banks can borrow reserves in the market and earn Bank Rate by depositing them at the Bank of England. A
10
https://www.bankofengland.co.uk/-/media/boe/files/sterling-monetary-framework/annual-report-2018-19.pdf
5
All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx
'floor' system
key merit of this so-called is that it can keep overnight interest rates close to Bank Rate despite
large changes in the supply of, or demand for, reserves (Chart 5). And rates have indeed been closer to
Bank Rate on average than at any point in the past twenty years (Chart 6).11 The regime in place prior to
QE, known as was also successful at
'reserves averaging', controlling interest rates when the stock of
reserves was relatively stable. But it did not cope as well when demand for reserves spiked and we had to
inject large quantities of reserves for liquidity insurance purposes during the crisis.
the current 'floor' framework
Chart 5: The market for central bank reserves under
Chart 6: Gap between Bank Rate and market overnight interest rates
Sources: Bloomberg and Bank calculations
11
Market rates are slightly below Bank rate because most overnight deposits with SMF participants come from businesses without
access to reserves: see https://www.bankofengland.co.uk/quarterly-bulletin/2018/2018-q1/sterling-money-markets-beneath-the-surface.
6
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MPC's
Waiting for the exit: (a) The QT strategy
monetary policy
How will the balance sheet evolve in the future? That depends heavily on the MPC's
decisions.
The MPC has been clear that its primary policy instrument is Bank Rate, which can move in either direction
from its current level of 0.75%. If the MPC chooses to ease policy and expand the balance sheet further as
part of that, the Bank is operationally ready to do so.
But at some point, as part of a future tightening strategy, the time will come to start reducing the stock of
-
purchased assets. Given the sums involved, this is not something to do lightly so the MPC has set out the
steps it will follow:
- First, the MPC does not intend to begin QT until Bank Rate has risen to a level from which it could
be cut materially if required. The MPC currently judges that to be around 1.5%.12
- Second, QT will be conducted over a number of years at a gradual and predictable pace, chosen by
the MPC in light of economic and financial market conditions at the time.
- Third, the QT path will take account of the need to maintain the orderly functioning of the gilt and
corporate bond markets including through liaison with the Debt Management Office.
- And, fourth, the QT path can be amended or reversed as required to achieve the inflation target.
When might this all start? No time soon, if you ask the financial markets! The current forward yield curve
does not reach 1.5% at all (Chart 7). But options markets price in a small probability of it occurring, and (as
the chart shows) expectations can shift quite rapidly: less than a year ago the implied central case start date
was in 2021.
12
This judgment was adjusted down from around 2% in June 2018, reflecting revised estimates of the effective lower bound for
Bank Rate. See https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-summary-and-minutes/2018/june-2018.pdf
7
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Chart 7: Market-implied start date for QT
Source: Bloomberg and Bank calculations
Note: Grey areas indicate where the forward OIS curve never reaches a level consistent with MPC guidance on QT.
Waiting for the exit: (b) Delivering our policy goals in the early phase of QT
Our job on the Bank executive is not to decide when to start QT, but to be ready to execute it when asked to
do so, and in a way that ensures that the Bank balance sheet continues to deliver all of our objectives.
Specifically, that means that we must be able to: maintain control of short-term interest rates; keep the
balance sheet flexible enough to meet the financial stability needs of the system (whether through liquidity
insurance or opening up the balance sheet to new participants as the financial sector evolves); and remain
ready to implement unconventional monetary expansion if the economy were to deteriorate.
Just as QE increased the quantity of central bank reserves, QT will reduce it. In the early stages of QT,
the Bank's policy
whilst reserves are still plentiful, goals are likely to be best met by maintaining the current
floor system. But a floor only works when there is a sufficient supply of reserves. At some point, QT will
drive reserves below the level reserves holders are comfortable holding at the prevailing policy rate, and that
- -
scarcity will begin to push short term market rates up above Bank Rate and make them more volatile as
firms bid up to borrow between themselves. At this point, if we were to do nothing, the existing framework
would cease to maintain interest rate control (Chart 8).13
13
Market rates would not rise without limit: under the Bank's 'Operational Standing Facilities', firms can borrow against high
quality
collateral at a spread of 25 basis points above Bank Rate.
8
All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx
Chart 8: Upwards pressure on short term interest rates under the floor system
Waiting for the exit: (c) Ensuring a smooth transition. Findings from the Discussion Paper
To judge where this instability might kick in, we need to understand why firms demand reserves - what they
use them for and how readily they would swap them for other liquid assets in different states of the world. In
economists' language, we need to understand the shape of the demand curve for reserves.
That's why
The difficulty is that this concept is not directly observable. we issued our Discussion Paper, as a
way of beginning a conversation with firms. Since then we have met a broad and representative range of our
counterparties: large and small, simple and complex, old and new, UK-based and overseas businesses. All
told, we spoke to firms accounting for about three-quarters of current reserves balances.
What did we find? Unsurprisingly, different firms thought about their reserves holdings in quite different ways
-
and no-one used the term 'demand curve'! Nevertheless, we can build up a picture of demand for reserves
by understanding three core drivers of demand, common to all firms.
First, at the most basic level,
firms hold reserves to meet both expected and unexpected sterling
payments during each day. The shape of this demand depends on firms' business models. Calendar
effects are important for retail banks, for example; whereas wholesale banks and gilt-edged market makers
are more affected by the ebb and flow of capital markets activity. And access to (and efficiency of) payment
and settlement systems can have important implications for the reserves that firms need to hold. So
the Bank's
innovations such as RTGS renewal programme14 have the potential to transform demand levels.
Second, reserves are an important form of insurance against liquidity outflows over short, but
Regulatory rules require firms to hold liquid assets to cover projected outflows over a
multi-day, horizons.
14
https://www.bankofengland.co.uk/payment-and-settlement/rtgs-renewal-programme
9
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have to -
thirty day period. This doesn't mean reserves firms could instead hold liquid government bonds,
mortgage backed securities or even equities. But, unlike reserves, such assets have to be liquidated in the
market before they can be used to meet outflows. Of the firms we spoke to, even those with strong market
access showed a marked reluctance to rely on that access as their only source of liquidity, particularly to
meet projected needs in the initial days of a liquidity stress. For that, they preferred to hold reserves.
'preferred minimum
Taken together, these two factors make up what I will call a range of reserves (PMRR)'
for firms. Chart 9 illustrates the aggregate PMRR for the market as a whole, defined as the region where
reserves begin to become scarce. We expect market interest rates to be relatively stable around Bank Rate
in this region. This range will naturally include any buffers that firms are holding above their true minimum
needs to deal with uncertainties over potential stressed outflows, access to wholesale markets and so on.
Chart 9: Locating the Preferred Minimum Range of Reserves
The third driver of demand is the rate of return firms can earn on reserves relative to other liquid
assets. In the current environment of very low bond yields, for example, reserves look quite attractive
relative to gilts and other liquid assets, encouraging firms to hold reserves well in excess of their minimum
preferred levels.15 But QT, when it comes, may imply a steeper yield curve than we see today. And that
would incentivise firms to term out their liquid asset holdings towards gilts and other securities and reduce
their reserve levels back towards their individual PMRRs.
An important question is whether this increased relative attractiveness of alternative liquid assets would also
That's
reduce the PMRR. Few of the firms we spoke to expected a big effect on their minimum holdings.
consistent with more detailed surveys carried out by the Federal Reserve, which suggested little response
15In practice, of course, asset prices are jointly determined with reserves demand: they will have adjusted to ensure that the aggregate
supply of reserves, determined by asset purchases, is willingly held.
even to quite large changes in the opportunity cost of holding US dollar reserves.16 But we should be
cautious of these findings when alternative rates of return have been so low for so long.
Bringing all this together, our conversations with firms suggest the current sterling PMRR is of the
firms' 'true minimum' demand to
order of £150-250bn. Table 1 breaks this down into a base estimate of
meet payments and liquidity outflow needs, and an additional estimate of the buffers held above these
draw on firms' descriptions of
minima.17 These estimates their preferred holdings and their management of
fluctuations in reserves levels, cross-referenced with our own analysis of historic reserves account activity.
Table 1: Current estimate of the UK PMRR based on feedback to the Discussion Paper
Estimate (£bn)
-
PMRR base 120 160
-
PMRR buffer 30 90
TOTAL PMRR 150 - 250
I should stress that there is no mechanical link between this figure and the quantity of gilts that the MPC will
need to sell during QT: it does not for example mean that gilt sales must stop when reserves levels hit the
PMRR. As I will come on to describe, the whole point of the balance sheet framework that we are proposing
is that it will allow the size of the balance sheet to be determined independently from the quantity and
composition of QE and QT.
Adding back the current level of banknotes and other non-reserves liabilities to the PMRR, and assuming
nothing else changes, suggests that a steady-state balance sheet after QT of £275-375bn (12-18% of GDP)
the Bank's monetary policy and financial stability policy objectives. That's
would be needed to deliver
it's
materially higher than pre-crisis levels. But roughly half where we are today (Chart 10), and narrower
than we've previously
indicated, reflecting the more detailed information available from the Discussion Paper
feedback.18 As one cross-check, the required reduction in reserves to get to the PMRR is proportionally
similar to that estimated for the United States by the Federal Reserve19.
16
https://www.federalreserve.gov/data/sfos/files/senior-financial-officer-survey-201809.pdf and
https://www.federalreserve.gov/data/sfos/files/senior-financial-officer-survey-201902.pdf
17No attempt is made to estimate any potential future rate of return effect.
18
http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/bank-of-england-inflationreports-hearings-session-201516/oral/29584.html
an estimate for the US 'Lowest
19An April 2019 speech by Lorie Logan, Senior Vice President of the New York Federal Reserve cites
Comfortable Level of Reserves' of
$800-900bn, which is around 30% of peak reserves ($2.8tn). By comparison, our PMRR estimate is
30-50% of current UK reserves. See https://www.newyorkfed.org/newsevents/speeches/2019/log190417 for details of the US estimate.
Chart 10: Estimated range for steady-state post-QT balance sheet
Source: Bank of England
At the same time, it is worth underscoring how uncertain this estimate of the PMRR still is. Like all informal
-
survey-based estimates, it is subject to sampling error. It reflects a varied set of responses from firms
many of whom are themselves, by their own admission, genuinely unsure how to calibrate their own future
demand after such a long period of abundant supply and low interest rates. And the PMRR will certainly
adjust over time in response to changes in external conditions. Factors which might reduce the future PMRR
include higher rates of return on alternative assets, or greater access to and confidence in the functioning of
short-term money markets. Factors which might increase the future PMRR include greater risk aversion or
further expansion in the range of firms with access to reserves accounts. For example the Bank recently
announced that it would be consulting on the appropriate level of access for new payments providers.20
Dealing with uncertainty: post-QE frameworks
We can, and will, continue to strengthen our analysis of the demand for reserves, through more structured
But if there's one big message I take from Discussion Paper exercise, it's that, no
and frequent dialogue. our
matter how deep we dig, we will still face persistent and material uncertainty about the future demand for
reserves. We must ensure our post-QT framework can deal with that uncertainty robustly if we are to be
confident that we can continue to use our balance sheet to deliver monetary and financial stability.
One response would be to stick with the simple floor, but stop contracting reserves well before we hit the
PMRR, leaving an ample buffer to ensure market interest rates are stable (Chart 9). This is the approach
20https://www.bankofengland.co.uk/-/media/boe/files/report/2019/response-to-the-future-of-finance-report.pdf
adopted by the US Federal Open Markets Committee (FOMC).21 The assets of the Federal Reserve have
fallen by over $600bn since US QT began in autumn 2017 - and US reserves are now more than 40% below
their 2014 peak (Chart 11).22
Chart 11: QE and QT in the United States
Source: FRED, Federal Reserve Bank of St Louis
We know from our own experience that this ample reserves floor system can be an effective way to deliver
unconventional monetary policy whilst also maintaining control of interest rates. It is particularly suited to the
US context, where the supply of reserves is subject to relatively large day-to-day variation as government
deposits with the central bank and other items fluctuate. But a key implication of this approach is the need to
maintain an estimate of when reserves will become scarce, in order to keep reserves supply well above that
level. As we have seen, this estimate is intrinsically uncertain.
The market impact of the early stages of US QT was extremely smooth, assisted by clear communications in
the Federal Reserve's assets would run off progressively over
advance about the way in which time. But
risky asset prices began moving more sharply in the later part of 2018 and into 2019, and there was
persistent upward pressure on some short-term money market rates relative to official rates (Chart 12).
Successive FOMC minutes recorded debates over how far these developments might reflect the impact of
falling reserves levels and balance sheet normalisation more broadly.
21
For the FOMC's current Balance Sheet Normalization Principles and Plans, see
https://www.federalreserve.gov/monetarypolicy/policy-normalization.htm
22
The larger and more volatile gap between total assets and the central bank reserves funding them in the US reflects a more important
role for non-reserves liabilities, including banknotes (which account for over 40% of the balance sheet, reflecting global demand) and
government deposits.
and policymakers' discussion23
Published Federal Reserve analysis suggested that reserves remained
clearly in the 'ample' zone, and ascribed upwards pressure on short-term interest rates to unrelated factors,
including the changed pace of Treasury bill issuance and changing dynamics in the repo market.
Nevertheless, in light of broader economic and financial conditions, the FOMC decided to announce a
somewhat earlier end-date for normalisation than market participants had been expecting at the start of QT.
That is expected to leave reserves initially 'somewhat above the level ... necessary to efficiently and
effectively implement monetary policy'. Reserves will then be allowed to decline gradually to that level over
time, as currency and other non-reserve liabilities grow.
Chart 12: US short-term interest rates since 2014
Source: Bloomberg and Bank calculations
In our Discussion Paper, we described a somewhat different approach to handling the uncertainty intrinsic to
estimating reserves demand. At an appropriate moment during the QT process, we proposed to switch from
using a simple floor system to a framework in which we allow reserves holders to determine how many
reserves they need. Under this approach, the Bank would stand ready to lend reserves, at Bank Rate, in
unlimited amounts against high quality collateral, through periodic Open Market Operations (OMOs) during
seek to 'oversupply' reserves in order to maintain
the QT phase. Such an approach does not a floor system,
and so avoids the need to estimate the point of reserves scarcity.
Bank's balance sheet
The should naturally be somewhat smaller under this system than it would be under an
'ample reserves' floor. That's partly
because we would not need to build in a buffer to account for uncertainty
But it's also
over the true level of the PMRR. because the balance sheet cost for banks obtaining reserves
via OMOs is likely to require there to be a degree of reserve scarcity before banks will participate.24 As a
result, the quantity of reserves should settle within the PMRR, where some reserves scarcity is evident.
23
See for instance 'Observations on Implementing Monetary Policy in an Regime' by Lorie K. Logan, at
Ample-Reserves
https://www.newyorkfed.org/newsevents/speeches/2019/log190417
24
Because they are secured funding transactions, OMOs will involve a leverage exposure, and will be subject to haircuts, which lower
the value of reserves lent relative to the collateral supplied.
A benefit of our approach is that it allows choices over the asset composition of our balance sheet (eg
between OMOs and outright holdings) during QT. At the same time, we retain one of the key benefits of a
floor system, which is the capacity to allow for the smooth expansion in assets and reserves in the future,
whether for liquidity insurance purposes or for monetary policy goals as directed by the MPC, without
interfering with interest rate setting.
At least two design challenges remain, however.
The first is that we cannot perfectly anticipate how short-term market interest rates will behave in the new
system, and will therefore need to be responsive in our operational approach:
- It is likely that market rates will be a little higher on average relative to Bank Rate than they are now,
reflecting the fact that reserves will be in somewhat scarce, rather than ample, supply. As a one-off
shift, this is unlikely to be of great significance to the setting of monetary policy.
- Market rates may be slightly more variable too, particularly initially as banks adjust to the new
system and learn to identify and bid for the amount of reserves they need.
Given the importance of achieving control of interest rates, it will be important to be ready to vary the nature
of our operations if either effect becomes problematic, for example by: running more frequent OMOs;
varying the terms of those OMOs; or amending our standing facilities. We take some comfort from our
discussions with banks that their demand for reserves within our framework should keep us on the relatively
flat part of the demand for reserves curve, limiting overnight rate volatility. Nevertheless we will continue to
deepen our understanding of the demand curve and its drivers through our own analysis, and through further
engagement with the market.
A second challenge is to ensure that the new system, when in place, works for all market participants. The
range and number of participants may well increase over time, and market structures may need to evolve to
support the effective transfer of reserves through the system. So we will prioritise work on OMO design to
ensure that SMF participants of all types, sizes and sophistication have ready access to reserves. In doing
so, we will need to take care not to impede developments in repo and other markets unduly.
Conclusions
Bank's balance sheet
The will not be returning to its pre-crisis form, even after QT. That reflects the role it
Bank's monetary policy and financial stability
needs to play in delivering the objectives in a new environment.
But the balance sheet will likely shrink materially as the APF is unwound, and our best current estimate of
the level of reserves under our proposed framework is in the range £150-250bn. As I mentioned earlier, this
number gives no indication about the extent of QE sales, because our proposed framework allows that to be
determined independently from the question of our medium term balance sheet size.
-
The Discussion Paper we issued in August last year was intended to stimulate debate and from that
debate improve our understanding of how the Bank of England's balance sheet should be managed in the
future.
It succeeded in doing so. Conversations with our counterparties have reinforced our intention to employ the
framework for controlling short term interest rates that we proposed in 2018. But it also helpfully raised
questions about the challenges we and participants will face during this period.
As a result we will be engaging carefully on the factors that will need to be taken into account in the design of
our future open market operations.
I hope my comments today will encourage thinking on this topic more broadly.
At times it can appear from the history of central banking that, when it comes to implementing policy,
practice leads theory by a long way. But practice always has to be underpinned by a clear grasp of reality:
this is the only way to achieve the Bank's
monetary and financial stability objectives. And that is how we will
continue to manage the Bank's balance sheet in the years to come.
Thank you