Today’s quantitative tightening decision putting unnecessary pressure on chancellor

Dominic Caddick, economist at the New Economics Foundation, said:

“Slowing quantitative tightening is a double-edged sword: it will ease pressure in bond markets but at the same time it will tighten the constraints the chancellor has imposed on herself through her fiscal rules. The Bank will be holding bonds on its balance sheet for longer. This prolongs the interest paid out on the central bank money created to buy bonds, which is currently outstripping the interest the Bank receives from those bonds.

“The Bank is effectively paying a massive subsidy to the banking sector, covered by money from the Treasury. But the Bank could reduce this by following the example of Switzerland and the Eurozone, by choosing to pay zero interest on some reserves. Or the chancellor could choose to simply tax commercial banks to reclaim some of their windfall.

“But these changes to quantitative tightening would not cause such a headache for the chancellor if she scrapped the Osborne-era policy of covering Bank of England losses with Treasury money. The European Central Bank and Federal Reserve are responsible for absorbing their own losses — the Bank of England should start doing the same.”

Notes

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