BoE aims for large but lean balance sheet when QE unwinds

The Bank of England is expecting to have a large but leaner balance sheet when it starts to run down its 895-billion-pound asset purchase program. It will take steps to ensure this does not push up short-term rates. Andrew Hauser, the BoE’s executive director for markets, said that the financial markets should not expect the central bank to intervene as it did in March 2020 aggressively. This was because of the fear of the COVID pandemic.

The BoE had announced last month that it expected to stop reinvesting the proceeds of maturing bonds from its quantitative easing program. Their interest rates had raised to 0.5% from their current 0.1%. After they had raised the BoE’s main interest rate to 1%, the policymakers would consider outright sales. Governor Andrew Bailey told lawmakers that he did not expect this policy to push bond yields.

Hauser, in a speech to the International Finance and Banking Society, said that he expected the size of the BoE’s balance sheet. This reflects QE purchases, banknotes in issue and other market operations. He added that overall, the size of the BoE’s balance sheet would fall but remain larger than before. In a public speech he said that they expect to adopt a market-led approach. In this they 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.

Hauser also added that the scale of the BoE’s intervention is in March 2020. This is when it restarted bond purchases to tackle market dysfunction, broader economic weakness etc., which were caused by the pandemic. Market participants should therefore build stronger self-insurance. They also should expect greater regulatory scrutiny, in exchange for central bank access.