BoE’s Bailey: Bank Underestimated its Fire Power

The Bank of England (BoE) underestimated the tools at its disposal in the event of a Covid-sized crisis and sees an ample supply of financial assets should the economy require further quantitative easing.

“It looks from today’s vantage point that we were too cautious about our remaining firepower pre-Covid,” said BoE Governor Andrew Bailey, addressing the Kansas City Federal Reserve symposium Friday. The central bank jamboree is taking place virtually this year, rather than in its historical site in Jackson Hole, Wyoming.

The governor, who took over the role just days before financial markets seized up in March, sees “a large outstanding stock of government bonds which could be purchased” in future rounds of quantitative easing and stressed that other assets, such as corporate bonds and commercial paper could also form part of a future stimulus programme.

There is “no natural answer” to the optimal size of a central bank’s balance sheet, he said, in response to a question posted by moderator Kristin Forbes, a former member of the Bank’s Monetary Policy Committee.

Bailey’s emphasis on asset purchases hints that the Bank could prioritise expanded quantitative easing over further rate cuts, although he insisted that the Bank’s “box does include other tools, including the possibility of negative rates.” The Bank reduced rates twice in March, leaving the benchmark at a record low 0.1%.

The governor also stressed the importance of clear communication with financial markets and consumers, noting that the MPC “pivoted” toward the stronger use of forward guidance – rather than quantitative easing – when presenting the results of its August rate-setting meeting.

However, the bank is unlikely to consider reducing its balance sheet until after rates begin to rise, he added. The unwinding of QE does not “seem like an imminent issue in current conditions”.

Laurie Laird

Julie Ros

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