Bank of England  Page 4  The large portfolio of gilts accumulated as a result of quantitative easing (QE) is being run down: since March, by ceasing to reinvest the proceeds of maturing bonds; and, since the start of this month, by selling gilts back to the market. The language surrounding monetary policy has shifted dramatically: from so-called forward guidance suggesting that Bank rate would remain at its effective lower bound until economic slack had eroded, to a more data-dependent outlook for interest rates reflecting current concerns over the persistence of inflationary pressures.2 This substantial shift has been driven by two factors. Normalisation of the monetary policy stance First, the stance of monetary policy needed to be normalised after more than a decade of exceptional ease, originally established in the face of the global financial crisis and then maintained more-or-less until this time last year. (Of course, the ‘normalisation’ implied here relates to historical norms for the level of Bank Rate and size of the Bank’s balance sheet.) With the failure of Lehman Brothers in 2008, Bank Rate was quickly floored at its effective lower bound, and additional easing was then provided through large-scale asset purchases. The resulting highly supportive overall stance was justified by a combination of downside risks to the inflation target, a weak economic outlook and tensions in the financial system, all of which had emerged in the aftermath of the financial crisis.
The MPC had decided to reduce the window over which it averaged UK asset prices in order to construct the conditioning assumptions for its forecast in order to exclude the peak of the market turmoil that had emerged at the end of September and early October. The MPC had delegated responsibility for judging whether markets had become dysfunctional and the operational decisions about pausing QT auctions to the Bank Executive. In particular, Sir Jon Cunliffe’s letters to the Treasury Select Committee (Cunliffe, 2022a,b) and a recent speech by Andrew Hauser, the Bank’s Executive Director for Markets (Hauser, 2022) offer a detailed account of the context and character of recent operational decisions. e.g. in Pill (2010) and Pill (2019). See: Busetto, et al. (2022). See: e.g. Hauser (2021). See Pill (2022). The Bank’s Financial Stability Reports have regularly discussed the risks faced and posed by the NBFI sector, in particular in the aftermath of the so-called ‘dash-for-cash’ episode in March 2020. As reflected in the subsequent discussion, in the Bank of England context, while the responsibility for setting Bank Rate lies wholly with the MPC, the responsibility for conducting asset purchases for purposes other than monetary policy lies elsewhere, likely with the Bank’s Executive.