Bailey, making a virtual appearance at the Jackson Hole central bankers’ rally, said the bank would not raise interest rates or sell the assets it bought as part of its buyout program. bonds, known as quantitative easing, until there is “significant progress” in eliminating the slack left by the recession and inflation has been brought back sustainably to its target of 2 %.
“This important step aims to ensure that monetary conditions do not tighten prematurely when there are initial signs of economic recovery,” he said.
The governor said that in order to act quickly and aggressively in the future, the Bank might need to create “leeway” by selling assets back to the markets, but he stressed that this point was still far from being reached.
The UK economy contracted 20% in the second quarter of 2020, but analysts expect the gradual easing of foreclosure restrictions from May to lead to around 15% growth in the third quarter .
The Bank responded to the crisis by lowering interest rates to 0.1% and increasing its asset purchases, initially by £ 200bn, then by an additional £ 100bn, over the summer . Bailey said Threadneedle Street has attempted a range of initiatives, including buying corporate and government bonds and helping companies manage their long-term cash flow.
“There are times when we have to go big and go fast,” Bailey said. “We are by no means short of firepower, and to be honest it seems, from a current perspective, we were overly cautious about our remaining firepower before Covid. But hindsight is a wonderful thing when you have it.
The governor said the Covid crisis provided central banks with their first big test since the 2008 financial crisis. “Monetary policy had to respond to an unprecedented shock. For many central banks, the main tool to date has been further quantitative easing (QE), on an unprecedented scale and pace of buying. ”
As part of QE, the Bank of England creates electronic money so that it can buy private sector bonds. The liquidity injection aims to calm the financial markets and increase purchasing power.
“Seen from the depth of the Covid crisis, QE has worked effectively,” Bailey said. “Measuring this effect accurately is, of course, difficult, as we cannot easily identify what the counterfactual would have been in the absence of QE. But QE has clearly acted to break a dangerous risk of transmitting severe market tension to the macro-economy by avoiding a sharp tightening of financial conditions and therefore an increase in effective interest rates.
Bailey’s strong support for asset purchases in his Jackson Hole speech was seen as a strong indication that another dose of QE would be the Bank’s first line of defense in the event of a weak economy over the years. next months.
Along with Bailey’s remarks, the Bank of England has published research setting out the case for canceling some of its asset purchases before raising interest rates – the opposite of the approach of its predecessor. Bailey, Mark Carney.
The discussion paper indicated that the impact of quantitative easing is highly dependent on the state of the economy, so that some of it may be possible to withdraw, thus creating scope for greater future action. , without tightening monetary conditions as much as raising interest rates.
“While it is possible to set the appropriate policy direction using alternative combinations of policy rate and QE, a combination that provides more room for future QE may be preferable, all other things being equal,” the Bank said.