Bank of England expects balance sheet to halve

The Bank of England’s balance sheet is likely to roughly halve to around 275-375 billion pounds ($341-465 billion) when the time comes to reverse quantitative easing, a senior official said on Wednesday.

It currently exceeds 600 billion pounds, having ballooned after the financial crisis as the BoE bought hundreds of billions of pounds of British government bonds to boost the economy.

Previously, the BoE said it expected its balance sheet to shrink when it ultimately reverses quantitative easing, but not to return to pre-crisis levels due to a long-term increase in commercial lenders’ demand to hold reserves at the central bank.

On Wednesday Andrew Hauser, the BoE’s executive director for markets, gave a specific estimate, and explained how the BoE intends to reduce any side-effects of gilt sales on banks’ day-to-day cash management.

“The ... framework that we are proposing ...will allow the size of the balance sheet to be determined independently from the quantity and composition of quantitative easing and quantitative tightening,” he said.

The structure of the BoE’s balance sheet affects how changes in interest rates are passed on to borrowers, and the ease with which banks can send each other money, though the BoE does not think it drives the volume of bank lending in Britain.

Currently, as a side-effect of QE, financial institutions hold far higher reserves at the BoE than they would normally need to facilitate interbank payments and meet short-term liquidity needs.