MNI: BOE Broadbent Envisages Rate Cut Before Halting QE Unwind

By David Robinson

     LONDON (MNI) - Bank of England Deputy Governor Ben Broadbent said that if

the Monetary Policy Committee (MPC) started unwinding quantitative easing and

inflation pressures eased, the MPC would respond by cutting Bank Rate first

rather than halting the unwind.

     In a speech at the Society of Professional Economists Broadbent fleshed out

the MPC's approach to QE unwind following its announcement last month that it

expected it to start when Bank Rate reached 1.5%, rather than 2.0% as it

previously indicated. Broadbent said that the MPC had been watching the US

Federal Reserve's Quantitative Tightening (QT) closely and had learnt from the

way the Fed has minimised the market impact.

     Broadbent said that the MPC's approach would be to set Bank Rate taking

into account the impact of ongoing QE unwind, with the policy rate as the active

instrument.

     "The framework is designed to ensure that, should inflationary pressures

weaken .. the first response would be to cut interest rates," he said.

     There would be a constant reduction of the Bank's balance sheet going on in

the background as the MPC decided what to do with Bank Rate at its regular

policy meetings.

     "Disinflationary influences might include the process of QE unwind itself.

To that extent, Bank Rate would be lower than it otherwise would have been,"

Broadbent said.

     The Fed has managed to avoid any repeat of the "taper tantrum" by

proceeding very gradually with balance sheet reduction and the MPC is following

in its footsteps.

     "In the US, where the Fed has begun to shrink its balance sheet, its "QT"

announcements appear to have had very little impact. At least in part, that's

likely to be by design. The pace of unwind is very gradual," Broadbent said.

     The MPC approach is designed to result in a similar, long drawn out

reduction in the Bank's stg445 billion asset pile, with the committee aiming to

ensure there is no significant disruptive effect on markets.

     Broadbent made no reference to the hot question of whether Bank Rate is

likely or not to be hiked at the August meeting in his speech. 

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

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