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LONDON – Ian McCafferty, one of the more hawkish members of the Bank of England’s Monetary Policy Committee, believes that the bank should start thinking about ending its quantitative easing programme ahead of schedule, following in the footsteps of the United States’ Federal Reserve.
Speaking in an interview with The Times published on Thursday, McCafferty said that as other central banks are doing it, the BoE should start thinking about it also.
“Given that other central banks are thinking about it, I think it would be remiss of us not to at least think about it,” McCafferty told the Times’ economics editor Phil Aldrick.
“I think it’s a question that needs a bit of asking.”
Britain’s central bank bought £375 million worth of assets – largely UK government bonds – during the financial crisis as a means of bolstering the economy and protecting it from further harm. It then extended that programme to a total of £435 billion last August in response to the UK’s vote to leave the European Union.
Current guidance from the bank, published in August 2014, is that QE will continue until “Bank Rate has reached a level from which it could be cut materially.” With a current interest rate of just 0.25%, the MPC would likely need to hike several times before that level is reached.
However, McCafferty argues that unwinding QE early could actually be used as a means of tightening monetary policy without having to aggressively raise rates.
“The slope of the yield curve is now abnormally flat,” he said.
“The unusual flatness then means you have slight distortions to discount rates [for pension funds], to the way in which firms think about investment, all sorts of things that maybe we need to consider.”
The basic idea would be that the Bank of England would stop reinvesting the principal of securities when they mature.
Put another way, when a 10-year Gilt (British government bond) on the BoE’s books comes due, the money it gets back from that investment will not be used to go out and buy another Gilt.
During the interview, McCafferty also reiterated his backing for a hike in the bank’s base rate from 0.25% to 0.5%, saying: “As of today, I would not be changing my position.”
He cited strong jobs data released this week, as well as an expectation that inflation will continue to rise as his reasons.