The Bank of England is preparing to halt its $1.2 trillion quantitative easing program, leaving the future of what has become a controversial crisis-fighting tool in doubt.
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After buying the first government security as part of an initial 75 billion pound plan during the financial crisis, the BOE will complete what could possibly be the last round of purchases as inflation hots up.
The decision would make the BOE the world's second major central bank, after Canada slowed its QE program during the epidemic. It may become the first to run down the massive holdings acquired during the virus with policy makers poised to raise interest rates in the coming months.
It would be a watershed moment for global monetary policy, with potential consequences for public finances if support was removed from support.
It could be a milestone in the U.K. Over the past few months, the tool has been criticized by current and former BOE officials, as well as lawmakers, who blamed it for helping the rich by inflating asset prices without providing broader economic benefits.
Policy makers may be more inclined to ditch QE as a go-to program to stimulate the economy when the central bank opens the door to negative interest rates.
Gregory Perdon, Co-CIO at Arbuthnot Latham, said that QE is now past its sell-by date and needs to be reduced slowly and carefully, a private bank and wealth manager in London.
The BOE is due to make its next monetary decision on December 16, a day after the purchases end. Here's a closer look at reasons to wonder if QE has run its course.
There are growing skepticism about the policy, especially among new members of the BOE. That is one reason to doubt that they will be keen to reactivate the tool for monetary policy.
Chief Economist Huw Pill said last month that we are moving to a world where QE is kind of going to be parked. He has complained about side effects and said more research is needed since taking over the role in September.
According to written testimony to Parliament, Pill wants to re-focus on his efforts towards deepening understanding of the policy tools and frameworks that emerged from the financial crisis and its aftermath.
Catherine Mann, another new policy maker, seems unconvinced, and joined Michael Saunders and Dave Ramsden in November to vote to curtail purchases early. Even Governor Andrew Bailey, who has doubled the BOE's balance sheet since taking over last year, says it needs to come down. The BOE leaned heavily on QE for the past decade because officials wanted a stimulus measure they could use without going into sub zero monetary policy.
That may now be less of a problem. Earlier this year, officials changed their view on negative interest rates and expanded their toolkit to include them. That gives the BOE more room to relax policy if necessary.
The government has always stressed that rates are their preferred tool and that cutting them has a direct impact on the economy. That raises the possibility that QE could become secondary in the future.
Even those who first initiated QE in the U.K. are troubled. Former Governor Mervyn King has suggested that the BOE was wrong to persist with 450 billion pounds in purchases during the epidemic. King served as governor for a decade until 2013 and oversaw 375 billion pounds in bond-buying.
At the time, two deputy governors have spoken out. Charlie Bean said last month that the tool should be used infrequently because of its less than ideal performance, while Paul Tucker advises against using QE again. He and Bean have had reservations for a long time and expressed doubts about its impact as long ago as 2012.
The political backdrop is also tricky. In a House of Lords report in July, lawmakers from Parliament's upper chamber including King accused the BOE of being addicted. They said officials seemed to use the tool as a cure for almost any economic setbacks, that it risks stoking inflation and widening inequality, and that it has done little to boost growth.
Michael Forsyth, chairperson of the committee, said that the scale and persistence of QE, now equivalent to 40% of GDP, requires significant scrutiny and accountability. The bank needs to be more transparent, justify the use of QE and show its working. Such opposition could make officials think twice before using it again, even though the BOE is independent.
QE could return with a vengeance if the BOE needs more firepower in a crisis, just as it did during the Pandemic despite prior qualms.
It might be more useful as a financial stability measure to calm markets in times of extreme volatility than as a monetary tool. Pill said that he could see an argument for involving the Financial Policy Committee in the governance of QE.
Andrew Hauser, the official of BOE markets this year, called for a new generation of tools aimed at financial dysfunction, designating the BOE as a money maker of last resort. None of the Fall of a Russian Cyberexecutive Who Went Against the Kremlin