Bank of England Shows ECB How to Shrink a Balance Sheet

The Bank of England was the first in this cycle to raise interest rates among the major central banks, and it's now blazing a trail in how to shrink a balance sheet. Its success in scaling back its corporate bond portfolio should give it confidence to speed up the liquidation of its much larger government debt holdings — provided market conditions continue to allow the sales. There are clear lessons here for the European Central Bank which will soon have to accelerate its own quantitative easing unwind.

The BOE stopped reinvesting its maturing gilt holdings at the end of 2021, and in November it started proactively selling gilts. Now it’s setting the example on exiting the corporate market. Central banks prefer exposure just to government debt risk, but the pandemic forced them into providing a wider safety net. As higher interest rates withdraw monetary stimulus globally, balance-sheet largesse also need to be removed.