BoE's Bailey says QE should be reversed before rate rises

The Bank of England should start reversing quantitative easing before raising interest rates on a sustained basis, its governor said on Monday, signalling a change in policy direction.

Andrew Bailey warned that high levels of central bank asset purchases "shouldn’t always be taken for granted" after the BoE bank last week increased its asset purchase target by £100bn to £745bn having cut the base interest rate to a record low 0.1%.

"When the time comes to withdraw monetary stimulus, in my opinion it may be better to consider adjusting the level of reserves first without waiting to raise interest rates on a sustained basis," the governor wrote in an article for Bloomberg.

The bank has had to fend off suggestions it is effectively underwriting the government’s debt as it spends billions dealing with the financial impact of the coronavirus crisis.

He also revealed that the bank saved Britain from effective insolvency during the early stages of the coronavirus crisis.

"We had a lot of volatility in core markets: the core exchange rate, core government bond markets. We were seeing things that were pretty unprecedented, certainly in recent times. And we were facing serious disorder.

"I think we would have a situation where in the worst element, the government would have struggled to fund itself in the short run."

Under Bailey’s predecessor Mark Carney, the Bank of England said it would lift rates materially before starting to sell asset purchases back to the market.

Bailey added that since the 2008-09 financial crisis the BoE had never had the opportunity to raise interest rates significantly and he did not want high central bank holdings of government debt to become a permanent feature.

"Elevated balance sheets could limit the room for manoeuvre in future emergencies," he said.