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--Carney: Treasury's BOE Capital Injection Facilitates Asset Purchase Unwind
--No Comment On Possible Timing of Next Bank Rate Hike
By David Robinson
LONDON (MNI) - A move by the Treasury to inject extra capital into the Bank
of England will make it easier for the Bank to unwind its asset purchases and
allow it to keep the effective zero lower bound (ZLB) at 0%, Governor Mark
Carney said Thursday.
The BOE Monetary Policy Committee (MPC) announced earlier Thursday that it
was likely to start unwinding QE once Bank Rate reached 1.5%, rather than the 2%
level it had previously cited. The lower 1.5% threshold is only possible if the
ZLB is near zero and in his Mansion House speech, Carney spelt out how the new
pieces of the jigsaw fitted together.
In August 2016, in the wake of the Brexit vote, the BOE launched the Term
Funding Scheme (TFS), which was indemnified by the Treasury and designed to
encourage banks to pass on the cut in Bank Rate. With the Treasury injecting new
capital into the Bank and allowing it to take more risk on to its balance sheet
the MPC will be able to re-launch the TFS when needed, ensuring bank lending is
not hit when Bank Rate is at, or very close to zero.
"The additional capital means the MPC could, if necessary, re-launch the
TFS in future on the Bank's balance sheet, cementing 0% at the lower bound,"
The ZLB is the level the policy rate can be cut to before it no longer
stimulates economic growth and key to that is what level commercial banks will
continue to maintain lending.
The MPC's guidance has been that it only wants to start unwinding its asset
purchases, notably reducing its mountain of stg435 billion of gilt purchases,
once Bank Rate is at a level from which it can be materially cut. This approach
amounts to delaying cutting the stock of asset purchases until Bank Rate is high
enough that cutting it should be enough to deal with a typical economic downturn
so where the ZLB is reckoned to be is a key factor in determining when QE unwind
--BALANCE SHEET MOVE
The TFS will move onto the BOE's balance sheet at the end of the 2018/19
financial year, giving the MPC control and also helping improve the public
finances by getting the lending off the Treasury books.
"Bringing the TFS onto the Bank's balance sheet next year will mark the
first step in winding down the Bank's Asset Purchase Facility (APF)," Carney
said, with stg127 billion of APF lending brought in house.
The MPC will, if Bank Rate is raised from its current 0.5% to 1.5%, then
start reducing the stg445 billion of asset purchases left in the APF.
Bank Rate will be the active policy instrument with the run down in the QE
pile "conducted over a number of years and at a gradual pace," Carney said.
If the MPC deemed lowering Bank Rate at any point would not be enough to
hit the inflation target the "reduction in the stock of assets could be amended
or reversed," he said, in other words QE could be re-launched if necessary.
The BOE Governor said that once QE had been unwound the Bank would decide
what assets to hold to back its liabilities. He said he saw a "strong case" for
holding some longer maturity assets, which leaves the door open to the Bank
continuing to hold a slug of the national debt stock.
The speech contained no commentary on when the next hike in Bank Rate is
likely to come.
--MNI London Bureau; tel: +44 203-586-2223; email: email@example.com