BOE Sees Balance Sheet Halving When QE Ultimately Unwinds

(Bloomberg) -- The Bank of England’s balance sheet should fall to around half its current size when quantitative easing is finally unwound, according to the executive director for markets.

While there’s no sign that the bond-purchase program will be pared back any time soon, a new BOE Discussion Paper on quantitative tightening suggests that the “steady state” balance sheet should ultimately be around 275 billion pounds ($341 billion) to 375 billion pounds, Andrew Hauser said in a speech in London.

That’s still large by historical standards, as the BOE has a bigger remit than before to safeguard the financial system, he said, but it is narrower than previously indicated.

“Big balance sheets are here to stay,” Hauser said. “We have a bigger responsibility than we did to provide liquidity to the system, in good times and bad, and to a wider set of organizations, to maintain financial stability.”

With its bond-buying plan in the aftermath of first the financial crisis, and then the Brexit referendum, the BOE’s balance sheet has risen more than sevenfold to around 30% of GDP. Policy makers have indicated there will only start unwinding purchases once interest rates reach 1.5% -- and financial markets don’t see rates hitting that level for at least five years.

Moreover, the proposed size of a post-QT balance sheet “gives no indication about the extent of QE sales,” Hauser said. The BOE’s “proposed framework allows that to be determined independently from the question of our medium term balance sheet size.”

He added that while other central banks may be able to achieve QT through not reinvesting as their holdings mature, the U.K.’s longer-dated debt profile means the BOE may be more reliant on actual sales.

--With assistance from Lucy Meakin.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Paul Gordon at pgordon6@bloomberg.net

©2019 Bloomberg L.P.