. 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, whilst reserves are still plentiful, the bank ’ s policy 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 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. 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. the difficulty is that this concept is not directly observable. that ’ s why 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,

big balance sheets are here to stay. that ’ s not a prediction that 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 of organisations, to maintain financial stability. and that ’ s not going away. point two is that big doesn ’ t mean outsized – so the balance sheet will eventually shrink from where it is today. that ’ s something the bank has 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 mission once qt is underway. knowing that is progress – but point three is we can ’ t get too comfortable, https : / / www. bankofengland. co. uk / - / media / boe / files / paper / 2018 / boe - future - balance - sheet - and - framework - for - controlling - interest - rates https : / / www. bankofengland. co. uk / - / media / boe / files / speech / 2018 / finding - the - right - balance - speech - by - dave - ramsden. pdf all speeches are available online at www. bankofengland. co. uk / publications / pages / speeches / default. aspx 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 one key reason – and that ’ s the nature of our liabilities. 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