MNI INTERVIEW: OBR Bean: Sees Partial, Prolonged BOE QE Unwind

--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.

     --MATCHED LIABILITIES

     "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

holdings.

     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

liabilities.

     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.

     --OBR CALCULATIONS

     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: david.robinson@marketnews.com

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