MNI BRIEF: Future CenBank Asset Buys May Be Less Aggressive

Financial market participants shouldn't make the assumption that central banks would respond as aggressively, through asset purchases and other measures, to future crises as they had to the Covid shock, Bank of England Executive Director, Markets Andrew Hauser told the International Finance and Banking Society Conference Monday. Market participants belief that central banks will buy up large amounts of assets in every crisis can result in perverse pricing effects, with risk premia going down rather than up in response to an economic shock, Hauser said, adding that future liquidity facilities are likely to come with caveats attached.

The BOE has set out plans to start reducing its asset purchases and Hauser said sketched out where the terminal point for balance sheet shrinkage lies, noting that through quantitative tightening at some point central bank reserves will be pushed below market demand for them, pushing up on market rates and at that point "we will need to replace long-duration QE assets with shorter term repos or other Open Market Operations to maintain the size of the balance sheet" if QT continues.