Overview
Bank of England Governor Andrew Bailey on Sunday set out his rationale for the central bank’s decision to pare back its holdings of British government debt. In a contribution to The Times, Bailey framed the reduction as a step to ensure the Bank retains the firepower to intervene in future episodes of economic strain.
Bailey’s rationale
Bailey said the Bank’s earlier purchases of government bonds under its quantitative easing program were instrumental in stabilising the economy during two major stress events - the global financial crisis and the COVID-19 pandemic. He argued that the role played by those bond purchases justified the policy at the time and that, with those crises now behind the economy, reversing the approach is the appropriate course.
"Many of those who now criticise QE were not saying as much at the time," Bailey wrote.
In his piece, Bailey emphasised that quantitative easing involved the central bank buying government bonds as a way to inject money into the economy when conditions were strained. The reduction in the Bank’s gilt holdings is presented as part of restoring the central bank’s balance sheet to a position from which it can mount similar interventions if required in future emergencies.
Implications highlighted
The governor’s statement reiterates the view that past use of bond purchases was an emergency tool and that the central bank’s capacity to deploy similar measures should be preserved. Bailey also pushed back on criticism of quantitative easing by noting that some critics were not vocal in support when the purchases were being made.
Concluding note
Bailey’s defence links the decision to reduce gilt holdings directly to the objective of restoring the Bank’s ability to act in a future crisis, while reaffirming the historical role of quantitative easing in supporting the economy during periods of severe stress.