The Bank of England will not return its balance sheet to levels seen before quantitative easing began after the 2008 financial crisis, Governor Andrew Bailey told UK lawmakers.
(Bloomberg) — The Bank of England will not return its balance sheet to levels seen before quantitative easing began after the 2008 financial crisis, Governor Andrew Bailey told UK lawmakers.
The BOE’s balance sheet grew to around £1 trillion in the pandemic as asset purchases increased to £895 billion. It has since shrunk to £880 billion as QE has been unwound.
Bailey said the BOE wants to reduce the size of it balance sheet further to give it headroom to respond to events in the future, but indicated that it will remain in the hundreds of billions of pounds. Before the financial crisis the balance sheet was less than £100 billion.
“I do not envisage the balance sheet returning to what it was before the financial crisis,” Bailey told the Treasury Committee at a hearing Thursday.
“The reason is the stock of reserves, the deposits banks make with us. That’s the highest form of bank liquidity. There is no question that the need for banks to hold larger cash reserves from a financial stability point of view is important.”
“My view on this is that it’s important from the point of looking forwards that the bank balance sheets adjusts so that it has headroom to do whatever we might need to do in the future.”
Dave Ramsden, deputy governor for markets, said he expected the impact on markets of unwinding QE – known as “quantitative tightening” – “will be small.”
Bailey stressed that QT was “not the active monetary tool” for tackling inflation, which is interest rates.
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