The Bank of England (BoE), which began to sell on the market the astronomical quantities of British debt accumulated since 2009, will not reduce its balance sheet to its level before the great financial crisis, its governor warned Thursday.
I do not see our balance sheet returning to its level before the use of QE, quantitative easing or the purchase of debt on the market, at the beginning of 2009 in the United Kingdom, affirmed Andrew Bailey before the Parliamentary Treasury Committee British.
Faced with the shock caused by the great financial crisis of 2008, the BoE, like most other central banks, began to buy British government and corporate bonds to stabilize the markets, and renewed the operation during the Covid-19 pandemic.
From less than 100 billion pounds before 2009, the balance sheet of the BoE rose to 895 billion pounds at the end of 2020.
The Bank has since announced that it would sell some of these assets, in order to have room for maneuver in the event of a future economic shock, said its governor.
But he ruled out returning to a balance sheet as small as before the crisis because there is a need for banks to hold more liquid reserves with the central bank.
One of Mr. Bailey’s assistants, Dave Ramsden, estimated during the same parliamentary hearing that the effect of bond sales on inflation would be limited.
For the first year of the securities sales programme, which started in November 2022, the objective was to sell 80 billion pounds of bonds, a figure which could be revised upwards for the following year, he added.
While the BoE is fighting against inflation which still exceeds 10% in the United Kingdom according to March figures, Mr Bailey assured that the bank’s preferred instrument was to raise its rates, currently at 4.5%, and that securities sales were not our active monetary policy tool.
The day before, in a speech, the governor acknowledged that the fight against inflation no longer concerned only external factors, such as the soaring price of electricity since the invasion of Ukraine by Russia.
External shocks interacted with the local economy. And while the inflation figure will come down, these second-round effects are unlikely to dissipate as quickly as they appeared, he warned.
An allusion to price increases decided by companies to protect their margins and to the wages demanded by employees, which fuel inflation and make central bankers fear a fearful inflationary spiral.
Short-term indicators suggest that wage increases will slow further later in the year, he noted, however.