The Bank of England’s (BoE) executive director for markets, Andrew Hauser, crossed the wires in the last hour and said that unwinding QE will become an integral part of future tightening strategies.
Key quotes:
- Central bank balance sheets in future will be structurally larger, even after current QE programmes unwind.
- Central banks will meet a bigger share of the structurally higher demand for liquidity, and contemplate possible central bank digital currencies.
- Central bank balance sheets will be more variable as they play a more active countercyclical role.
- Central banks should place the burden of proof on explaining why financial markets cannot manage functioning better.
- Where intervention is needed, the central bank should set clear ex-ante expectations, minimise predictable adverse effects, and develop clear exit strategies.
- Any future targeted standing facilities are likely to make it clear that markets should not expect central banks to respond as aggressively to dysfunction unrelated to a global pandemic.
- Market participants should therefore build stronger self-insurance, and expect greater regulatory scrutiny, in exchange for central bank access.
- We expect to adopt a market-led approach, in which we allow reserves to fall as QE assets roll-off, but stand ready to replace any demand shortfall that might arise through shorter-term open market operations.
Market reaction
The remarks did little to influence the British pound or lend any support to the GBP/USD pair, which remained depressed near the 1.3800 mark amid a broad-based US dollar strength.