Thread by @BenChu_

When the Bank of England (one day) starts tightening monetary policy will it start by:

a) raising interest rates?

b) or reversing QE?...

A short thread🧵

Before Covid the Bank said it wouldn't start reversing QE until Bank rate was up to around 1.5%.

But Andrew Bailey wrote last June that it *could* start reversing QE first...2/

"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."...3/ bloomberg.com/opinion/articl…

Why?

Well, Bailey spoke a bit more about this during the Q&A at this interesting @resfoundation event...4/ resolutionfoundation.org/events/the-eco…

...Essentially, he doesn't think rates are going up to 1.5% any time soon and that he's concerned that the Bank owning some 40% of UK Gilts in issue may not give it sufficient "room for manouvre" for the next crisis, when it may need to offer more monetary support..5/

...In other words, Bailey is a bit concerned about the size of the Bank's balance sheet.

Trouble is that we don't know the effectiveness/transmission of bond sales vs rate rises as a monetary tightening tool in a UK context...6/

Also note that "bond sales BEFORE rate rises" is not official Bank policy - other Monetary Policy Committee members may well not agree with it.

ENDS

ADD: this line from Bailey's speech suggests that this question is far from settled within the Bank:

ADD2: If you worry Bank of England is low on "room for manoeuvre" on future QE maybe don't look at Japan...

https://twitter.com/RobinBrooksIIF/status/1367473455868895236?s=20

....though should add that given Japan has a gross debt/GDP ratio of 266% the BoJ's share of domestic government bonds is similar to the Bank of England's