MNI ANALYSIS: Ex-BOE Exec: QE Unwind As Monpol Likely Undoable

--TSC Adviser, ex-BOE, Bill Allen Says BOE Can't Sustain Silence On QE Unwind

--Allen Advocates T-Bill Switch; Can't Treat Gilt Sales As Monpol Tool

By David Robinson

     LONDON (MNI) - The Bank of England's deafening silence over its plans to

unwind quantitative easing is unsustainable, an adviser to the Treasury Select

Committee (TSC) and former top BOE executive, said.

     Bill Allen, former BOE Deputy Director, said that the central bank's

current approach to QE unwinding, with the Monetary Policy Committee issuing

guidance that entails it is unlikely to happen any time soon while offering no

detail on how it will work, cannot be maintained.

     "It is certainly not sustainable. The Fed have published very detailed

guidance ... The Bank of England are miles behind and they are in danger of

painting themselves into a corner," Allen told Market News International

exclusively.

     Dave Ramsden, the top Treasury official who starts as the BOE's new deputy

governor for markets and banking next month and who will have the unenviable job

of leading on QE unwind, is set for a public confirmation hearing with the TSC.

His predecessor, Charlotte Hogg, offered the committee no enlightenment on the

Bank's QE strategy.

     "When Charlotte Hogg was being interviewed by the Treasury Select Committee

(about) QE she had nothing new to say. She just repeated what (Governor Mark)

Carney had said before," Allen said.

     The BOE has bought stg435 billion of gilts, equivalent to around three

years of gross gilt issuance, as well as stg10 billion of corporate bonds.

     The MPC's guidance on unwinding QE has evolved from saying it would start

once Bank Rate, currently at 0.25%, was "raised to a level from which it can be

cut materially" to adding that this was "judged to be around 2%."

     The MPC has also stated that the proceeds of maturing gilts will be

reinvested, so the QE gilt stock is not getting any smaller and with market rate

curves showing Bank Rate still below 1% and the end of the BOE's three year

forecast horizon, so there is no indication of when unwinding is likely to

start.

     Allen thinks that the sheer scale of the debt overhang means it is

unrealistic to use gilt sales as a tool for tightening monetary policy.

     "I think that is impossible. They have got to find a way of easing the

gilts back into the market ... You have to do it when the market is there. It is

not that liquid a market, so what you have to do is to sell the gilts when you

can and adapt short-term interest rate policy ... to compensate for its effect

on the economy," Allen said.

     While Carney has made the case for using Bank Rate as the initial policy

tightening tool there has been precious little clarity over how QE unwind is

expected to proceed if and when Bank Rate does finally hit 2%.

     Allen, in an article published by the National Institute of Economic and

Social Research in its August Review, set out one way that the BOE could

disencumber itself of its gilt burden. 

     Allen is concerned that with the government guaranteeing any losses on the

Bank's QE purchases and its stg100 billion plus bank funding scheme, its

independence is being compromised with some 95% of its assets having a Treasury

guarantee.

     Allen's proposal is to put the Debt Management Office in control of the

Bank's gilts by transferring them to the DMO in exchange for newly-created

Treasury bills, which the Bank could then proceed to sell in a few months.

     Commercial banks would end up with Treasury bills while lowering their

balances at the BOE, which Allen believes would be policy neutral as it would

not result in any change in bank behaviour.

     The Treasury bills and BOE balances are both liquid assets so there would

be no change to the banks liquidity coverage ratio.

     Also "with Treasury bills there is almost no interest rate risk so it

wouldn't affect their interest rate risk position. It doesn't affect their

credit risk positioning either because they are both zero weighted. I don't

think it would affect the banks behaviour at all," Allen said.

     The DMO, on the other hand, would be left with the challenge of having to

auction the pile of extra gilts, which would likely take years to complete and

would tend to steepen the yield curve.

     "The Bank of England might decide to go easy on raising short-term interest

rates while the gilts are being sold. That is the kind of thing they would

assess as they went along," he said.

     The MPC would, in this scenario, be factoring into policy the impact of

gilt sales that were dictated by market conditions rather than determining the

scale, and timetable, for those sales.

     If the MPC does see the need to add stimulus with Bank Rate at its

effective zero lower bound, which it reckons is above zero but below the current

0.25%, Allen thinks it should look at credit easing.

     When the global financial crisis bit deep, the BOE's easing strategy was

set under the strictures of former Governor Mervyn King, who was firmly opposed

to credit easing, leaving the MPC with its mass gilt purchases.

     "They could try that (credit easing) next time as that is a lot easier to

unwind because the short-term debt just runs off by itself," Allen said.

     Carney and his MPC colleagues have publicly highlighted the evidence that

QE has not become impotent. While the effects of the second round of QE appeared

to be less than the first, the latest post-Brexit vote easing has seemingly had

more impact than they had expected.

     The big question left hanging is how they are going to unwind it. Ramsden's

upcoming confirmation hearing in front of the TSC, with the date still to be

fixed as the committee has yet to re-convene following the general election and

Summer recess, will be one occasion to try and get more clarity and fresh

thinking on it.

     "It is an important question and I think the Bank of England ought to be

saying more about it than they have done, which is almost nothing," Allen said.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$B$$$,M$E$$$,MX$$$$,M$$BE$]