Waiting for the exit: QT and the Bank of England’s long-term balance sheet
Speech given by
Andrew Hauser, Executive Director, Markets
At the European Bank for Reconstruction and Development, London, and hosted by the Association for Financial Markets in Europe (AFME), International Swaps and Derivatives Association (ISDA) & International Capital Market Association (ICMA)
17 July 2019
To jump to the punchline, I have four key messages. The first is that, judged by historical standards, big balance sheets are here to stay. That’s not a prediction that QE will never unwind: it will. But 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 organisations, to maintain financial stability. And that’s not going away. Point two is that big doesn’t meanoutsized – so the balance sheet will eventually shrink from where it is today. That’s something the Bank hasbeen stressing for some time. But the Discussion Paper has allowed us to put a tighter range on that forecast, and suggests our liabilities probably only need to be half the size they are today to carry out our mission once QT is underway. Knowing that is progress – but point three is we can’t get too comfortable, because the margin of uncertainty around that estimate is high. Neither we nor the firms who use our liquidity really know what their demand will be when conditions normalise. And that uncertainty could pose challenges as we exit, as the recent experience of QT in the United States has arguably shown. The final message, therefore, is that we must have as our ultimate goal an end-state framework that can cope with that ambiguity without shaking itself, and us, to bits. We think we have an approach that can meet that challenge – but we need to keep testing that, with your help.