Further information on the QE reduction and interest rate levels from the BOE

Just reading through the Carney speech Si’s put up, there’s some additional detail on the decision to only start unwinding QE when rates reached 1.5% vs the 2.0% prior;

The MPC updated its guidance today on unwinding its asset purchases. Previously, the Committee had noted that it would not begin reducing the stock of assets until Bank Rate had reached around 2%. That reflected the MPC’s preference to use Bank Rate as the primary instrument for monetary policy and its desire to have sufficient scope to cut Bank Rate materially – relative to the effective lower bound on Bank Rate of 0.5% at that time – if necessary to respond to adverse shocks.

Although the principles guiding the MPC’s choice of threshold still hold, with the lower bound on Bank Rate now permanently close to 0%, the MPC views that the level from which Bank Rate can be cut materially is now around 1.5%. Reflecting this, the MPC now intends not to reduce the stock of purchased assets until Bank Rate reaches around 1.5%.

What that is effectively saying is that QE is still on the table while rates remain below 1.5%. It also, by proxy, gives the market a target rate the BOE wants to achieve for what it feels is a good margin level to be able to cut from to help the economy. That sets the BOE rate bar at a much lower level than the Fed for example, who is looking for rates up to 2%+.

Another interesting point is that they will be taking over the Term Funding Scheme by bringing it on to their balance sheet. That’s some £127bn. In doing so, they will be able to use this money again via a relaunch of the TFS, thus adding a layer in between rate cuts and QE in the mon pol tool box.

For markets, it could be construed as slightly dovish in that we know the minimum the BOE wants rates at, and that’s now lower by 0.5%. That also lowers the bar on when QE could be restarted on a downturn. Taking a snapshot of the here and now and where the economy and interest rates are, there’s a higher chance of QE starting again than rate hikes. That also makes an August hike more farcical. The only way the BOE would hike in August is to grow that interest rate margin.

Ryan Littlestone

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