UK | MPC’s hawkish shift puts spotlight on reversing QE

Rising odds of an early rate hike have brought the BoE’s guidance on when it will start reversing course on asset purchases into sharper focus. Market rate pricing currently suggest that reinvestments could cease as early as spring 2022, although we think August next year is more likely.

What you will learn:

• Assuming financial markets are functioning normally at that point, and the future path of interest rates is clearly signalled, the MPC believes the
  macroeconomic consequences of quantitative tightening (QT) would be small.
• In our view, the MPC’s premise is reasonable. Decisions around QT shouldn’t greatly affect the pace at which the official interest rate rises, nor the space to cut borrowing costs in the event of a future shock.
• But even allowing for a muted effect from QT and scope to take rates negative, the BoE’s room to support the economy with rate cuts will be very limited for years to come. So QE-to-QT is unlikely to be a one-way street.