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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$]