Abstract
▪ The BoE has updated its guidance for when it will begin to reverse asset purchases. If financial markets are functioning normally at that point, and the future path of interest rates is clearly signalled, the central bank thinks the macroeconomic consequences of quantitative tightening (QT) should be small. ▪ This seems a reasonable premise. If so, decisions around QT should not greatly affect the pace at which the official interest rate rises and, relatedly, 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 Bank Rate negative, room to support the economy with rate cuts looks like staying very limited for years to come. So QE‐to‐QT is unlikely to be a one‐way street.
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