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--OBR And Ex-BOE Deputy Governor Bean On QE Unwind
By David Robinson
LONDON (MNI) - The Bank of England will likely conduct a partial, gradual
unwind of the assets it acquired through quantitative easing (QE), retaining a
large slug of gilts on its books, former BOE Deputy Governor Charles Bean
envisages and outlines in an interview with MNI.
Bean, now a senior official with the Office for Budget Responsibility, has
a key role in producing the official projections of how any QE unwind could
impact the public finances.
Talking to MNI, Bean set out how the Bank could shrink its stg445 billion
Asset Purchase Facility (APF), its QE vehicle, and still end up with a balance
sheet far larger than before the global financial crisis (GFC).
"You could have a situation where there is some organic run off of the APF
with redemptions not renewed. You could have some active asset sales and then
finally some of the gilts might well be bought by the Bank to put on its own
balance sheet to back the high volume of reserves," Bean said.
Ahead of the GFC commercial banks' reserve holdings at the Bank were
slim-line, around stg20 billion, but for years to come they are expected to be a
lot larger than that.
"It is far more likely that they will be holding Stg100 billion plus," Bean
said and the Bank could match these liabilities in part, at least, through gilt
In 2009, when the BOE Monetary Policy Committee (MPC) began its QE
programme it introduced a new sterling money market regime based on a floor
framework, under which banks' reserves were remunerated at Bank Rate.
In his June 20 Mansion House speech BOE Governor Mark Carney said that when
QE unwind was underway, the Bank was "minded to continue to use a variant of the
current floor system" and that it would choose what assets to hold to back its
Such a liquidity set-up would be based on substantial reserves and the Bank
would "have something on the other side of its balance sheet to balance that and
gilts are one possibility," Bean said.
Rather than running down the current stg435 billion gilt holdings to near
zero, the BOE could still end up with stg100 billion plus of gilts on its
balance sheet after completing its QE unwind programme, making life a lot easier
for the UK's gilt issuer, the Debt Management Office (DMO).
Bean envisages that the MPC will make a rolling series of announcements of
gilt sales once QE unwind begins, which under the new guidance is likely when
Bank Rate, currently at 0.5%, hits 1.5%.
"You wouldn't commit to, say, selling all of the APF or all but a hundred
(billion) of it now over the next five, ten years or whatever. It's most
plausible that the committee would decide to sell relatively modest amounts over
the next six months or maybe a year," Bean said.
The OBR will have to factor QE unwind into its fiscal forecast through
estimated debt interest costs if and when money market curves show Bank Rate
hitting 1.5%, although at present the curve is near flat once it hits 1.25%.
How exactly QE unwind will be incorporated "will depend on whether the MPC
says anything explicit about when they expect to start sales or for that matter
stop rolling over maturing debt," Bean said.
If there is no public pronouncement, Bean said that as a matter of
transparency the OBR would not utilise private guidance from the Bank.
"We know enough about how they are likely to do it that it is not too
difficult for us to put in at least a sensible baseline," he said.
--MNI London Bureau; tel: +44 203-586-2223; email: email@example.com
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