The Bank must do much more to explain its thinking

While the headlines of last week’s Bank of England decision were captured by the 8-1 vote to maintain its interest rate at 5 per cent, an equally important decision was largely overlooked. This was to reduce the rate at which the Bank is selling bonds back to investors. This so-called quantitative tightening will shrink the Bank’s balance sheet by another £100 billion in the coming 12 months.
The size of the Bank’s holding of bonds matters both for assessing the right level of interest rates for the economy and for the chancellor’s tax and spending decisions before Labour’s first budget. Bond sales lower bond prices, which in turn may force the Bank into more interest rate cuts than might have been the case.
In the process of selling the bonds — which the Bank bought to support the economy during the 2008 financial crisis, in 2016 after Brexit and again during Covid — the Bank is making extraordinary losses, the bill for which is being picked up by the Treasury. The total loss could rise to £100 billion over the next decade. These losses swamp any fiscal gains from winter fuel allowances being cut or VAT on private schools, although slowing the sale of bonds (from £48 billion last year to £13 billion in the next 12 months) will give Rachel Reeves a little more room for manoeuvre against an arbitrary fiscal rule.
Since being granted independence in the first few days of the incoming Labour government in 1997, the Bank has done much to improve transparency, moving decisively away from the mystique that dominated the cosy world of central banking. The publication of minutes, inflation analysis, blogs and timetabled decisions are all welcome.
But much more can be done. The Bank should undertake a review of the whole programme of bond purchases going back to 2009 to help us to understand whether the positive impact (stabilising the economy) has outweighed the huge costs.
Press conferences on monetary policy are only quarterly and are only attended by the governor and two of his deputies — not even the chief economist is present. These sessions should follow every meeting of the monetary policy committee (MPC) with other members present. It is important that we give more agency to dissenting voices and understand views that may differ from conventional central bank modelling.
The MPC should also do more to present its views on the likely path of interest rates: too many people still wrongly think the Bank rate is heading back to the days of 0.5 per cent at the end of this cycle.
Jagjit Chadha is director of the National Institute of Economic and Social Research