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Sectoral Factor Inflation Model Accelerates

MNI (London)

The Bank of England is likely to provide more detail of its assessment of the impact of quantitative easing following criticism in a report by the House of Lords Economic Affairs Committee, with its upcoming review of its tightening strategy giving it the chance for a full explanation, MNI understands.

The LEAC report released early on Friday raised concerns about secrecy and political pressures surrounding QE and highlighted the BOE's failure to publish more estimates of the effects of the later rounds of bond purchases.

But the Bank has found the impact of QE hard to disentangle and inconsistent through time, with Monetary Policy Committee members unable to reach a collective position on the matter, MNI understands. The uncertainty surrounding QE is also mirrored in the problem of trying to estimate the likely effects of upcoming quantitative tightening, as BOE economists review its strategy for withdrawing stimulus, and as MPC members including Michael Saunders and Dave Ramsden begin to suggest that the time to act against inflation may be drawing near.

The results of this review are expected later this year, and the BOE has not announced any firm release date. While some more facets of its thinking on QE may appear beforehand, they are not likely to provide clues to the review's conclusions, despite the knuckle-rapping received from LEAC.

BOE economists have been trying to determine how best to sequence QT with hikes in Bank Rate, which some MPC members see as a more potent and precise tool, arguing that bond purchases' impact on monetary conditions fluctuates depending on changes in market conditions.

POLITICAL RISK

The agreed view at the Bank is that quantitative tightening will be state contingent like QE, and influenced by market conditions, but there is a dearth of examples for how it has worked in the past, with the BOE itself having no experience. Nonetheless, the Bank may be keen to get on with running down holdings running at about 40% of the national debt stock, given the danger, highlighted by both the LEAC report and recently-departed former Chief Economist Andy Haldane, of being subjected to political pressure once interest rates start rising.

In its first wave of QE, following the global financial crisis, the Bank provided a ready reckoner that GBP1 billion of QE was equivalent to 1 basis point off Bank Rate. But by the second round, in response to the sovereign debt crisis, the ready reckoners had gone and they have still to return.

Bank Governor Andrew Bailey says QE appears to be most effective in illiquid markets, as following the Covid shock in March 2020, when it helped hammer yield curves flat.

But, according to ex-MPC member Kristin Forbes, the Bank was surprised at the effectiveness of its third QE package, in response to the EU referendum in 2016, when markets remained liquid throughout. Other officials have noted however that separating the effects of QE from other tools also deployed in 2016, such as forward guidance, is not straightforward. Markets had also priced in QE by then, they note, making its effect even harder to discern.

The most recent asset purchases, once the Covid shock faded, may be having minimal effect, according to independent MPC members including Gertjan Vlieghe, who will leave his post at the end of August, although neither Bank economists nor the MPC collectively have signed up to detailed public estimates.

MNI London Bureau | +44 203-586-2223 | david.robinson@marketnews.com
MNI London Bureau | +44 203-586-2223 | david.robinson@marketnews.com