MNI China Daily Summary: Monday, July 29

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Saunders on asset purchases

BOE
  • "Asset purchases are an important part of the BOE's toolkit and we made an extensive use of them during the pandemic. I think they played a valuable role in helping to support the economy. I think there are good reasons to expect that the effect on the economy of selling gilts will not be the mirror image of the effect of buying them - that the effects of gilt sales will be smaller than the effect of gilt purchases.
  • "For two main reasons: one is that quite a lot of the gilt purchases have been done at points in time where financial markets are stressed; purchases under those conditions have a relatively large impact. So if you're doing gilt sales at a time when financial markets are not stressed, you would expect that the impact woul dbe less."
  • "The other issue is the singalling effect. Asset purchases contain a policy signal of low for longer. Gilt sales don't contain any such policy signal. So you've seen that asset purchases helped to push down front-end rate expectations because of that policy signal, but the lack of any such signal means you wouldn't expect gilt sales to push up on rate expectations. Indeed, to an extent I don't think gilt sales have any effect on restraining the economy. To an extent, can regard them as a substitute for Bank Rate tightening. To call them a substitute is probably not quite the right word... Bank Rate will be the primary tightening tool. It's rather gilt sales will be complementary. They will be going in the same way as Bank Rate. It's not an alternative, it's not really a substitute for Bank Rate."

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