At an appropriate moment during the QT process, we proposed to switch from using a simple floor system to a framework in which we allow reserves holders to determine how many reserves they need. Under this approach, the Bank would stand ready to lend reserves, at Bank Rate, in unlimited amounts against high quality collateral, through periodic Open Market Operations (OMOs) during the QT phase. Such an approach does not seek to ‘oversupply’ reserves in order to maintain a floor system, and so avoids the need to estimate the point of reserves scarcity. The Bank’s balance sheet should naturally be somewhat smaller under this system than it would be under an ‘ample reserves’ floor. That’s partly because we would not need to build in a buffer to account for uncertainty over the true level of the PMRR. But it’s also because the balance sheet cost for banks obtaining reserves via OMOs is likely to require there to be a degree of reserve scarcity before banks will participate.24 As a result, the quantity of reserves should settle within the PMRR, where some reserves scarcity is evident. See for instance ‘Observations on Implementing Monetary Policy in an Ample-Reserves Regime’ by Lorie K. Logan, at https://www.newyorkfed.org/newsevents/speeches/2019/log190417 24 Because they are secured funding transactions, OMOs will involve a leverage exposure, and will be subject to haircuts, which lower the value of reserves lent relative to the collateral supplied.
To make the macroeconomic effects of QE more concrete: previous Bank of England analysis suggests that the initial £ billion of QE during QE1 may have increased GDP by 1.5%–2% and inflation by 0.75pp–1.5pp.19 Using similar estimates in a 2016 speech, Mark Carney, estimated that if the MPC had left monetary policy – Bank Rate and QE – unchanged in the financial crisis, the level of GDP would have been 8% lower and 1.5 million more people would have been out of work.20  Whether the £ of QE we announced last March had the same impact is a complex question, and there are arguments in both directions as to whether its impact will turn out to have been larger or smaller. On the one hand, government bond yields have been very low by historical standards and it is possible that there may be limits to how much more QE can do to push them down. On the other hand, our March purchases in particular took place as I have said against a backdrop of extreme market disorder. Our purchases, alongside other policy measures here and abroad, were instrumental in restoring order, and indeed we deliberately carried them out at an unprecedentedly fast pace to achieve that – in the words of the Governor, Andrew Bailey, we “went big and fast”. Had we not done this then that market disorder might, as we said at the time, have led to an unwarranted tightening of monetary and financial conditions, and an even sharper contraction in GDP.