By David Milliken
LONDON (Reuters) -The Bank of England needs to pay closer attention to the impact of its quantitative tightening programme on monetary and financial conditions now that it is cutting interest rates, BoE policymaker Catherine Mann said on Monday.
The British central bank makes a decision on the pace at which it reverses its past quantitative tightening once a year, with the next decision due in September. The BoE is currently reducing its bond holdings at a rate of 100 billion pounds ($135 billion) a year through a mix of outright sales and not reinvesting the proceeds of maturing bonds.
When the BoE made its last annual decision on QT, it had only just started to cut its Bank Rate, but since then it has cut interest rates three times more.
“Now that the MPC is reducing restrictiveness, I believe that we need to consider the differing effects of our policies on different parts of the yield curve and their effects on monetary policy transmission as a more salient issue,” Mann said in the text of remarks released by the central bank.
The BoE has previously said the impact of its quantitative tightening policies on pushing up British government bond yields is small and can be offset if needed by faster interest rate cuts.
But Mann, who voted against the BoE’s last rate cut, said a rise in long-dated bond yields could not be fully counterbalanced by cutting overnight interest rates, and that it might be undesirable to attempt to do so.
“An additional cut in this cycle of Bank Rate reduction, so as to try to compensate for tightening at the long end, could run counter to the need to maintain restrictiveness for long enough to purge the structural rigidities in labour and product markets that I have often noted are key to my Bank Rate decisions,” she said.
QT over the next 12-month period was also likely to reduce reserves in Britain’s financial system to the point at which banks needed to regularly rely on BoE repo operations to have sufficient liquidity, she added.
“On balance sheet normalisation, unlike with policy rates, central banks are in uncharted territory,” she said. “This has important monetary policy implications as we head into the September decision.”
Mann, an external member of the BoE’s Monetary Policy Committee, is due to deliver the remarks at a conference hosted by the U.S. Federal Reserve later on Monday.
British 30-year government bond yields hit their highest level since 1998 in April during market turmoil following U.S. President Donald Trump’s announcement of wide-ranging tariffs.
Asked about the prospect of slowing QT last month, BoE Deputy Governor Dave Ramsden told a press conference that the central bank had only just started this year’s consideration of the appropriate stance for QT.
Investors polled by the central bank last month said they expected the BoE to reduce the pace of QT to 75 billion pounds over the next 12-month period, their lowest expectation since the BoE started its current annual QT cycle.
($1 = 0.7396 pounds)
(Reporting by David Milliken, Editing by Tomasz Janowski and Timothy Heritage)
