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Bank policymakers give greater flexibility to act, with negative rates and earlier QT adopted.
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The Bank of England Monetary Policy Committee's tightening strategy review found a compromise solution with the policy rate threshold to trigger quantitative tightening not scrapped, but lowered from 1.5% to just 0.5%, with guidance stressing that QT should start at a gradual and predictable pace by not reinvesting the proceeds from Bank's maturing gilts, rather than selling existing holdings.
The MPC's review left key questions hanging, seeming to reflect a lack of consensus on the committee. While negative rates were finally added to the policy toolkit, no answer was given to the question of how far below zero the effective lower bound was thought to be.
The MPC stated that the factors determining where the QT threshold should include the probable impact of policy changes, that is the policy multipliers for QT and Bank Rate, and policymaker's "judgement about the effective lower bound."
LOWER BOUND FLOATS
The MPC, and the Bank economists, however, did not publish any estimate of either the lower bound or the policy multipliers and, with negative rates now in the policy toolkit, the Bank did not announce what the tiering regime would be. Tiering matters for estimating the effective lower bound as it protects a chunk of banks' reserves from negative rates, which in turn reduces the impact on banks' net interest margins and their ability to pass on rate cuts to business and consumers.
Instead BOE Governor Andrew Bailey when questioned, highlighted the uncertainty over the lower bound, saying that it was not helpful to think of it as a single number as it moves around.
The MPC is, and will continue to be, divided over negative rates. One member Silvana Tenreyro, has previously said she thought that the effective lower bound was at least minus 75 basis points. But Deputy Governors Ben Broadbent and Dave Ramsden have expressed doubts about the extent to which negative rates would be passed through. Incoming member Catherine Mann has also expressed deep scepticism about their benefits
Bailey had previously made the case for reducing the size of the Bank's balance sheet in order to free up policy space to deal with future shocks. Asked it had been a difficult for him to leave a threshold in place, he stressed that the tightening approach was a committee decision. The upshot is that the MPC is now following an approach that it will only start QT when Bank Rate rises from its current 0.1% to a level, 0.5% which, on the Bank's reading, is not fully priced into current market curves for another three years.
The threshold, however, could plausibly be hit a lot earlier than that, as Bailey and his colleagues stressed that on the current forecasts inflation overshoots the 2.0% target on the Bank's constant rate projection, although it undershoots on the market curve, and that modest tightening was likely to be needed with markets currently pricing in a 0.4% policy rate in two years' time.
The Monetary Policy Report's forecasts reaffirmed the MPC's view that after a couple of calendar years of rapid post Covid shock growth the UK economy will decelerate sharply, dropping back to around its pre-Covid trend rate of 0.3 to 0.4% a quarter, with annualised growth estimated to be running at just 1.3% three years down the line, and inflation dipping below the 2.0% target.
The MPC, having failed to unwind any of the asset purchase pile built up in response to the global financial and sovereign debt crises, has put QT on the map while still predicting a return to a low growth world.