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Opinion
Marcus Ashworth

Bank of England Takes a $100 Billion Leap Into the Unknown

Reducing its balance sheet while simultaneously raising interest rates takes the UK central bank into dangerous waters.

Here Be Dragons.

Here Be Dragons.

Photographer: Jason Alden/Bloomberg

Central banks are about to start withdrawing the stimulus they’ve pumped into their economies by buying bonds. For the Bank of England in particular, reducing its balance sheet while simultaneously raising interest rates takes monetary policy into uncharted territory. Policy makers could quickly find themselves in the crosshairs, blamed for exacerbating the economic slowdown they’ve forecast.

The UK central bank, already well into its interest-rate hiking cycle, is about to accelerate the contraction of its £863 billion ($1.04 trillion) quantitative-easing portfolio. In March, it stopped reinvesting maturing debt; after its Sept. 15 policy meeting, it plans to start selling gilts into the secondary market. The trouble is, because the past 13 years have seen nothing but more and more QE, first in the wake of the global financial crisis and then to keep growth alive during the pandemic, nobody knows the economic impact of taking away £80 billion — close to $100 billion — of central bank liquidity annually.