Quantitative tightening

Treasury Committee Closed Inquiry
Opened: 31 Jan 2023 Closed: 1 May 2024 Parliament page
This inquiry will examine quantitative tightening, including its impact on the economy and its fiscal costs. It will also investigate the role of quantitative easing and tightening in the current outbreak of double-digit inflation and in bringing inflation down. Read the call for evidence to find out more about the … Read more
10 Recommendations
12 Conclusions
1 Report
5 Letters
2 Events
Activity timeline 9 events
18 Apr
2024
Report published
7 Feb
2024
Report published
12 Jan
2024
Correspondence
12 Jan
2024
Correspondence
12 Jan
2024
Correspondence
12 Jan
2024
Correspondence
18 May
2023
Formal meeting (oral evidence session) · The Bank of England (Restricted in-person public access)
18 Apr
2023
Formal meeting (oral evidence session) · The Wilson Room, Portcullis House
21 Mar
2023
Correspondence
Title HC No. Published Items Response
Fifth Report - Quantitative Tightening HC 219 7 Feb 2024 22 Responded
Recommendations & Conclusions
22 results
1 Conclusion Accepted
Fifth Report - Quantitative Tighte…
Bank of England's strategic framework for quantitative tightening is broadly reasonable
There are a variety of views about the desirability of the Bank of England undertaking quantitative tightening (QT), whether it has a good strategic framework for doing so, and whether it is conducting QT at an appropriate pace. Nonetheless, much … Read more
Government Response
The Bank welcomes the committee's finding that its strategic framework for QT is broadly reasonable and reiterates its existing strategy, guided by three key principles, for unwinding asset purchases.
HM Treasury
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2 Conclusion Accepted
Fifth Report - Quantitative Tighte…
Bank of England calibrates quantitative tightening to minimise impacts and create future space
Since it has some bearing on our later conclusions, we note here that the Bank and Monetary Policy Committee (MPC) have determined: that QT is not being used as an active tool of monetary policy; that they are calibrating QT … Read more
Government Response
The government's response outlines the MPC's existing strategy for unwinding asset purchases, guided by principles such as using Bank Rate as the primary tool and conducting QT gradually. They explain that the MPC's framework for monetary policy is robust and that annual reviews are conducted to support predictable QT decisions.
HM Treasury
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3 Conclusion Acknowledged
Fifth Report - Quantitative Tighte…
Bank of England lacks established long-term strategy for balance sheet size and composition
One area in which the Bank’s strategy is less well established regards the long-term steady-state size and composition of its balance sheet, which may have a bearing on the longer-term conduct of QT and which, as we note later, may … Read more
Government Response
The government acknowledges the issues regarding the long-term size and composition of the Bank's balance sheet. They refer to previous communications outlining potential compositions and state that the Treasury is engaging with the Bank on these issues, noting that international central banks are also reviewing their balance sheets and any changes will be communicated when appropriate.
HM Treasury
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4 Recommendation Accepted
Fifth Report - Quantitative Tighte…
Develop detailed planning on long-term balance sheet size and provide regular public updates
The Bank should develop its planning on this long-term steady-state size and composition of its balance sheet, and how this relates to QT, in more detail and give regular public updates on the likely future size and composition of its … Read more
Government Response
The government states the Bank is continuing to analyse the optimal steady-state level of reserves and is undertaking work to determine the long-term mix of assets for its balance sheet. Decisions on its future size and shape will be made in consultation with HM Treasury and communicated transparently.
HM Treasury
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5 Conclusion Accepted
Fifth Report - Quantitative Tighte…
Bank of England lacks specific tracking of quantitative tightening's economic impacts
QT is a comparatively untested monetary policy tool, and it is understandable that the Bank would find it challenging to model its effects as part of its forecast. We have seen supporting evidence for the Bank’s contention that it is … Read more
Government Response
The government explains that the MPC already takes QT's impact into account through asset price assessments, annual reviews, and regular monitoring in reports and minutes. They state that Bank staff use various modelling tools and conduct quantitative analysis to estimate QT's impact and that this remains an active research area for the Bank and other central banks.
HM Treasury
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6 Recommendation Rejected
Fifth Report - Quantitative Tighte…
Develop forecasting tools for QT impact and provide quarterly public updates to Parliament
The Bank should develop its forecasting and modelling tools for understanding the impact of QT and look to how these can be integrated into the forecasting and communication process. Given the uncertainty over its effects, the Bank should also Quantitative … Read more
Government Response
The government states the MPC considers QE/QT impact in annual reviews, which it deems appropriate, and includes assessments in quarterly reports. It also notes that Bank staff already use various modelling tools and quantitative analysis for QT impact, with this remaining an active research area, but does not commit to the recommended new developments or dedicated quarterly updates.
HM Treasury
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7 Conclusion Accepted
Fifth Report - Quantitative Tighte…
Quantitative Tightening presents an untested intervention amidst high gilt issuance, risking financial instability.
There are no clear signs that QT has resulted in financial stability issues to date, either in the gilt market or more widely. We also recognise that bringing down the share of gilts owned by the Bank in favour of … Read more
Government Response
The government explains that the Bank and FPC are already taking action to protect financial stability, including providing facilities for non-bank institutions and addressing market dysfunction. They clarify that QT is conducted for monetary policy, designed to be gradual and predictable, and that financial stability tools can be used independently in the event of market dysfunction.
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8 Recommendation Acknowledged
Fifth Report - Quantitative Tighte…
Prioritise developing a new backstop facility and transparent contingency for suspending Quantitative Tightening.
The Bank is right to work on a new backstop facility to reduce the chance of having to resort to gilt purchases in future, and given that QT is ongoing, it should work on this as a priority. In the … Read more
Government Response
The government outlines the Bank's and FPC's ongoing work to enhance financial stability through private self-insurance, market infrastructure, and liquidity regulation, and mentions facilities to lend to non-bank institutions, emphasizing that financial stability tools can be used without constraining monetary policy decisions for QT.
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9 Recommendation Rejected
Fifth Report - Quantitative Tighte…
Publish more frequent updates on gilt market participant demand and sentiment.
Given the unusually high extent of gilt sales in the coming years, the Bank and the Debt Management Office should publish more frequent updates on gilt market participant demand and sentiment. (Paragraph 51) The fiscal impact of quantitative easing and … Read more
Government Response
The government states the Bank already publishes aggregate gilt market demand and auction results, and surveys market participants. However, it rejects the recommendation for the DMO to publish market sentiment updates, arguing it risks negatively impacting market behaviour and falls outside its mandate as a price taker.
HM Treasury
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10 Conclusion Acknowledged
Fifth Report - Quantitative Tighte…
Current QE/QT arrangements lack value-for-money scrutiny, unsuitable for vast sums of public money.
Notwithstanding the need to ensure that the programmes are compatible with the operational independence of monetary policy, it strikes us as highly anomalous that decisions have been and are being taken about QE and QT concerning huge sums of public … Read more
Government Response
The Bank recognises the committee's concerns regarding value for money and clarity, stating its operations are designed to maximise value for money by minimising cost and risk over the lifetime of the APF, subject to policy objectives.
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11 Recommendation Accepted
Fifth Report - Quantitative Tighte…
Revisit arrangements for future Quantitative Easing considering value-for-money, public spending, and Bank independence.
We recognise that QE and QT are processes already well in train, and it may not be possible to make large changes to the arrangements made in 2009 and 2012 without impacts on the credibility of the UK macroeconomic framework. … Read more
Government Response
The government clarifies that future QE would not proceed automatically, as the Chancellor must authorise APF increases based on value-for-money assessments and Accounting Officer advice. It commits to keeping its approach to managing cashflows under review and considering lessons learned should QE be deployed again.
HM Treasury
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12 Conclusion Rejected
Fifth Report - Quantitative Tighte…
Bank and MPC underestimate trade-offs between QT pace and annual losses.
While the Governor played down the impact that decisions over the pace of QT have on the scale of lifetime gains and losses arising from QE and QT, the evidence presented to us shows that there is some trade-off between … Read more
Government Response
The government reiterates that Bank Rate is the primary active monetary policy tool and that the MPC discusses QT parameters annually. It asserts there is little evidence that a different QT pace would significantly alter overall cashflows or total costs from the APF, though it impacts the timing of losses.
HM Treasury
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13 Recommendation Accepted
Fifth Report - Quantitative Tighte…
Explore including value-for-money and Treasury spending criteria in ongoing QT pace decisions.
That being so, while it is right that MPC members should have monetary policy and the inflation target foremost in their thinking and decision-making, the Bank and Treasury should explore how criteria on value for money and the spending power … Read more
Government Response
The government clarifies that while MPC decisions are independent, the Bank's operational implementation of QT already prioritizes value for money by minimising cost and risk over the APF's lifetime, subject to MPC objectives, through mechanisms like auction design.
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14 Conclusion Acknowledged
Fifth Report - Quantitative Tighte…
Bank officials hold divergent views on the economic impact of later Quantitative Easing rounds.
It is right to say that the overall effectiveness and value-for-money of QE and QT should be judged by their wider macroeconomic impacts on inflation, growth, and employment, rather than on the direct fiscal costs alone. There is agreement among … Read more
Government Response
The Bank acknowledges the committee's observation on judging QE/QT effectiveness by wider macroeconomic impacts, but emphasizes that ongoing evaluation of monetary policy decisions for value for money would hinder MPC independence, while confirming the framework design remains under review.
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15 Recommendation Rejected
Fifth Report - Quantitative Tighte…
Assess value for money of all past QE rounds for future selective use.
In its response to this report, the Bank should set out whether it thinks that all individual rounds of QE have proved to be good value for money considering the later fiscal cost. In any future QE, lessons should be … Read more
Government Response
The Bank rejects the recommendation to assess the value for money of individual QE rounds, asserting the MPC's independence from fiscal considerations; however, the Treasury commits to keeping its approach to cashflow management under review and considering lessons learned should QE be deployed again.
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16 Conclusion Accepted
Fifth Report - Quantitative Tighte…
Chancellor’s role in approving APF changes for QE/QT remains unclear.
The Chancellor’s role in approving changes in the size or composition of the APF that houses the QE and QT programme remains unclear to us, since on one hand the Chancellor insists that decisions over QE and QT are taken … Read more
Government Response
The government clarifies the Chancellor's role, explaining that while the MPC maintains operational independence, the Chancellor's authorisation for APF indemnity relates to Treasury's responsibility for public funds, involving assessments of fiscal and macroeconomic impacts.
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17 Recommendation Accepted
Fifth Report - Quantitative Tighte…
Clarify whether Chancellor’s APF authorisation is substantial or formal and explain macro-economic impacts
The Treasury should clarify whether the Chancellor’s authorisation of changes to the APF involves a substantial decision or is only a formal endorsement of the MPC’s decision, and explain the extent of the assessment of macro-economic and fiscal impacts that … Read more
Government Response
The government clarifies that the Chancellor's authorisation of APF changes focuses on the increased contingent liability and supports MPC independence, with risk assessment differing for expansion versus unwind. It confirms that decisions to approve indemnity increases are made case-by-case based on value-for-money assessments, implying no automatic threshold.
HM Treasury
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18 Conclusion Not Addressed
Fifth Report - Quantitative Tighte…
Committee does not support cutting remuneration of Bank reserves due to financial stability concerns
We have received proposals for interventions that would cut the remuneration of bank reserves and thereby reduce the ongoing losses arising from QE and QT. However, we have also received evidence that cutting remuneration now could be similar to a … Read more
Government Response
The government discusses the cashflows between HM Treasury and the APF, highlighting the transparency of the Bank's reporting and the wider economic impacts of QE and QT. The response does not directly address the committee's conclusion that it does not support cutting the remuneration of Bank reserves.
HM Treasury
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19 Conclusion Acknowledged
Fifth Report - Quantitative Tighte…
Lack of information on future Bank balance sheet arrangements at steady-state reserves
Some witnesses thought that the remuneration of reserves would need to be reconsidered once reserves had reached their future steady-state level. However, there is a lack of information about future arrangements for the Bank’s balance sheet once the steady-state level … Read more
Government Response
The government clarifies the Bank's arrangements for normalising its balance sheet, detailing the role of liquidity facilities as reserves fall. It states that the Bank is continuing to analyse the optimal steady-state level of reserves for monetary and financial stability.
HM Treasury
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20 Recommendation Deferred
Fifth Report - Quantitative Tighte…
Clarify future arrangements for steady-state level of reserves on Bank’s balance sheet
The Bank and Treasury should clarify the future arrangements for the steady-state level of reserves on the Bank’s balance sheet as soon as possible, including the future of QT at that point, the assets that will be used to back … Read more
Government Response
The Bank acknowledges the need to clarify future arrangements for the steady-state level of reserves and states it is 'continuing to analyse' the optimal level, with decisions to be made in close consultation with HM Treasury and communicated transparently.
HM Treasury
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21 Conclusion Acknowledged
Fifth Report - Quantitative Tighte…
QE and QT losses create worrying direct links between monetary and fiscal policy
QE and QT losses, the fiscal rules, the regular remittances of profits arising from QE from the Bank to the Treasury and indemnity payments to cover losses from the Treasury to the Bank interact to create direct and immediate links … Read more
Government Response
The government acknowledges that monetary policy decisions have fiscal implications but stresses the importance of the Bank of England's operational independence. It explains that the current arrangements, including the MoU and transparent APF cashflows, are designed to manage these interactions, and that broader economic impacts of QE/QT are also considered.
HM Treasury
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22 Recommendation Rejected
Fifth Report - Quantitative Tighte…
Examine inclusion of indemnity payments in fiscal rules debt and revisit QE/QT accounting
The Treasury should examine whether it is appropriate that ongoing indemnity payments are included in the debt targeted by the fiscal rules, subject to maintaining the credibility of the UK’s macroeconomic framework. For any future rounds of QT, the Treasury … Read more
Government Response
The government rejects the recommendation to exclude indemnity payments from fiscal rules, stating substantial fiscal costs should not be ignored. It also explains that a deferred asset approach for accounting profits and losses is not feasible due to the UK's unique arrangements but commits to keeping its approach to managing cashflows under review for any future QE.
HM Treasury
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Government Response AI assessment · 22 of 10 classified
Accepted 9
Acknowledged 6
Deferred 1
Not Addressed 1
Rejected 5
Total 10 recs + 12 conclusions
Correspondence 5 letters
12 Jan 2024 From committee Letter to Bank of England relating to Cashflows arising from quantitative easing and tightening, dated 4 December
Parliament page
12 Jan 2024 From committee Letter to HM Treasury, Permanent Secretary relating to Cashflows arising from quantitative easing and tightening, dated 4 December
Parliament page
12 Jan 2024 To committee Letter from Bank of England relating to Cashflows arising from quantitative easing and tightening, dated 18 December
Parliament page
12 Jan 2024 To committee Letter from HM Treasury, Permanent Secretary relating to Cashflows arising from quantitative easing and tightening, dated 15 December
Parliament page
21 Mar 2023 Correspondence from the Bank of England relating to the inquiry into Quantitative Tightening, dated 16 March
Parliament page