Bank of England’s Pill: We should not have slowed QT bond sales
The Bank of England’s chief economist has hit out at colleagues’ recent decision to slow sales of the central bank’s government debt stockpile, warning it risked papering over underlying drivers of spiking government borrowing costs and causing a “more painful” crisis in the future.
In a speech delivered in Geneva, Huw Pill told delegates that the Monetary Policy Committee’s choice last week to reduce the speed of its quantitative tightening programme was unnecessary, and that there was scope to shrink its balance sheet faster.
“I put a higher weight on the need to get out of the [quantitative easing] portfolio a little bit quicker and I have greater faith that market functioning is perhaps a bit more strong than others,” he said. “I do think we have other tools in order to address concerns about market functioning.”
Pill was the only member of the Bank’s nine-member MPC to dissent from a consensus choice to slow the speed at which the Bank unwound the government debt it has on its books as a legacy of its decade-long QE programme.
Seven committee members voted to reduce the speed of sales from £100bn to £70bn over the next year, while external member Catherine Mann called for an even slower reduction of £62bn. The MPC cited fears the programme – which is the only one to involve actively selling government debt into the market – was straining parts of the gilt market, particularly in longer term bonds.
The cost of long-term UK government borrowing has climbed sharply this year, with the yield on 30-year gilts reaching its highest this century earlier this month, before falling back slightly in recent weeks.
Bank of England QT programme costing Treasury billions
Pill opted to maintain the current £100bn rundown in the face of these moves; a choice that would have involved a sharp uptick in the number of active bond sales and made the UK even more of an international outlier.
In his speech on Tuesday, the Bank of England’s chief economist, who is among the more hawkish MPC members, said that even though there were risks “QT would disrupt on market functioning”, he placed more weight on “maintaining the continuity and consistency” with the programme.
The central banker also argued that other factors – including the changing make-up of defined benefit pension schemes and the country’s strained public finances – were more responsible for driving the yield on government debt than the Bank’s QT programme.
“Slowing QT is a temporary and indirect palliative, likely dominated in terms of effectiveness by other tools,” he said. “And the danger exists that measures to treat the symptoms simply allow the underlying drivers to continue for longer and in greater force, making the eventual denouement more painful all around.”
The Bank of England’s QT programme has been coming under heightened public scrutiny, with critics arguing it is compounding the already bleak fiscal picture. The sales have been carried out at huge losses, which the Treasury has been forced to plug using taxpayer money.
The programme is on course to leave the taxpayer more than £100bn out of pocket by the time it is concluded, according to Bank estimates, and added £18bn to borrowing costs last year alone.
But Pill attributed those losses to a design problem with the Chancellor’s fiscal rules, saying: “I don’t think that’s the responsibility of the central bank to deal with.”
“You need to have fiscal rules that are well-designed to deal with the magnitude of these flows arising from decisions were made about QE in the past,” he added.