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    From Ros Altmann:economist and pensions,
    investment and retirement policy expert

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    Bank of England QT should be paused – it’s undermining markets, the economy and fiscal policy too

    Bank of England QT should be paused – it’s undermining markets, the economy and fiscal policy too

    • Bank of England should cut base rate quickly and put QT on hold.  
    • Monetary policy is undermining growth, unsettling financial markets and damaging the Chancellor’s fiscal policy options – rates have been too high for too long.
    • Short rates around 5% with Inflation only at 2-3%, on top of monetary tightening form QT gilt sales, leaves rates too high and will depress growth, especially after Budget tax rises.
    • QT should be put on hold for the rest of the year at least, to allow proper assessment of how monetary policy has interfered with financial markets and economic activity.

    Since the 2008 financial crisis, central bank Quantitative Easing (QE) policies created trillions of pounds of new money, in order to buy bonds and force long-term interest rates lower. This aggressive lowering of long-term interest rates, initially aiming to fight deflation, was coupled with a drastic reduction of short-term interest rates to around zero. QE has been a massive experiment and continued long after deflation threats disappeared. Nobody knows what the long-term impacts will be.

    Traditional monetary policy inflation-targeting turned into ‘money-tree policy’ – creating new money by magic, to keep spending going: The intention was to underpin global economic growth, ensuring interest costs were low enough to keep spending and investment going. But many of the side-effects were ignored until a couple of years ago. While the QE party kept going, Governments could keep spending without fearing rising deficits and massive borrowing costs, while financial markets and investors were enjoying good returns, since falling bond yields boosted all asset prices.

    It was only when inflation took off, that central banks realised the party had to end:  Central banks recognised they had gone too far and had to stop the ‘money-printing’ and bond purchases. This was always supposed to happen, but the impacts of stopping this massive policy easing experiment were unknown. Central banks and politicians did not perhaps fully recognise the fallout from years of effectively interfering with capital market pricing mechanisms and supporting growing fiscal deficits across the world. What is clear, however, is that moving from a period of massive bond buying, to massive bond selling, is unlikely to be conducive to financial market stability or market equilibrium.

    QE was a significant easing of monetary policy, QT is a significant tightening: With inflation in the 2-3% range, bank rate around 5% makes real interest rates high – and higher than in most other countries.  In addition, the Bank of England’s aggressive bond sales have helped to push up gilt yields to multi-year highs – which is a further significant tightening of monetary conditions.

    Continuing with its bond sales is likely to hinder growth and harm the Chancellor’s fiscal policy options: QE was an artificial boost to all asset prices and an easing of economic policy conditions that allowed Chancellors to spend more than they otherwise could.  QT is the reverse.  This Quantitative Tightening (QT) is obviously driving interest rates higher than they would otherwise be. This means monetary policy is tightening, not only because short-term rates have been pushed up to high levels, but also because long rates are depressing economic activity and sucking liquidity away from financial markets.

    Scale of QT has been enormous and the policy piles extra costs on the Treasury and all taxpayers: The scale of bond sales since 2022 has been enormous.  Over the entire period from 2009 to 2022, the Bank of England bought not far short of a trillion pounds with newly created money.  In the past 2 years or so, it has sold at least £200billion of bonds into the markets.  A warning of the past few days’ bond market turmoil was given in November 2022, when the combination of Kami-kwasi fiscal worries and Bank of England bond sales, caused long rates to spike upwards. The same seems to be happening again now.

    Bank of England should urgently consider putting QT on hold:  I believe it is vital that the Bank of England puts further gilt sales on hold, to allow a period of stability; to ease the aggressively tight monetary policy it has imposed onto the economy; and to curb the taxpayer costs being pushed onto the Treasury – both as a result of the sales at big losses and as a consequence of pushing up the costs of Government borrowing. A careful analysis of bond investment flows and the impact of QT, combined with short-rates and tax rises, should be undertaken.

    Policy is too tight on most measures: Growth and inflation are certainly not showing signs of significant strength, but both short-rates and long-rates are being kept high by the Bank of England.  Just as QE and monetary easing were kept in place too long, I fear that the tightening seen since 2022 post-pandemic, is also being too aggressive and needs to be urgently relaxed.

    Taxpayer losses from QT are mounting quickly: A look at the Bank of England’s statistics (See Asset Purchase Facility section here https://www.bankofengland.co.uk/markets/bank-of-england-market-operations-guide/results-and-usage-data ) shows that gilts are now being sold in large quantities at yields well over 4%. These sales are incurring significant losses. Much of the QE asset purchases were bought at much higher prices – with yields well below 2% in the past ten years or so. This has significant negative impacts on our economy and fiscal policy room for manoeuvre.

    Bank of England is putting huge costs onto the Treasury and taxpayers: The UK is pretty unique among central banks in terms of its QE policy decisions, because the Bank of England does not need to worry about how much money it loses when it sells the bonds it purchased under QE.  That is because the UK Treasury – i.e. taxpayers – have to underwrite the losses instead. Of course, during the QE years, the Treasury enjoyed money being sent to it by the Bank of England if it made profits from maturing gilts bought at lower prices in the past.  But the situation is now damagingly reversed, with the Chancellor having to transfer billions of pounds to the Bank of England, to compensate for the losses being sustained in selling the bonds held in the Asset Purchase Facility.

    Monetary policy is inflicting higher fiscal spending, which will damage growth: It is time for policymakers to recognise the need for careful management of these massive amounts of money and for the UK to wake up to the potential damage being caused by a combination of tight monetary policy, tax increases and rising Government debts, partly inflated by higher interest rates. What is the rush to sell these bond holdings, especially at such losses?  QT should surely be done very slowly, over the long-term. And, in future, such underwriting by the Treasury may need to be re-thought.


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