The Bank of England formally ended QE in November 2012. The MPC, however, has acquiesced in a form of “stealth QE” by failing to sterilise the monetary impact of the transfers of net coupon income from the Bank’s Asset Purchase Facility (APF) to the Treasury, announced by the Chancellor in his Autumn Statement. This stealth injection is estimated to have been £23 billion in the first half and will rise to about £47 billion by the end of 2013-14.

Conventional QE involves the Bank creating central bank reserves to pay for purchases of gilts from the market. This results in 1) expansion of the Bank’s balance sheet, 2) expansion of the monetary base (i.e. physical cash plus reserves) and 3) a rise in sterling bank deposits as the accounts of those selling gilts to the Bank are credited.

In the stealth operation, the Bank makes a transfer from its retained profit account to the Treasury’s account with the Bank. The Treasury then runs down the balance in this account to finance the budget deficit, thereby injecting liquidity into the economy. The end-result is a rise in both the monetary base and sterling bank deposits; these higher deposits are the mirror-image of lower official gilt sales due to the transfer. The only difference from conventional QE is that the size of the Bank’s balance sheet is unchanged but this is of no economic significance.

The Bank transferred £11.3 billion to the Treasury during the first quarter of 2013 and is on course to pay a further £11.7 billion in the second quarter*, giving a first-half total of £23 billion. The transfers will “taper” to about £8 billion per quarter over the coming three quarters (i.e. to end-March 2014)**. They will fall further in 2014-15 – to about £3 billion per quarter if Bank rate remains at 0.5% and the stock of asset purchases is held at £375 billion.

The MPC’s acquiescence in the stealth operation has left it open to the charge of allowing the Treasury to drive a change in monetary policy. The view here is that, following the Autumn Statement announcement, the Committee should have redefined its QE target as the stock of asset purchases plus cumulative transfers from the APF to the Treasury. A formal vote should then have been conducted on whether to raise this target or to sterilise the monetary impact of the transfers, by selling gilts of equal value. Such action would have made clear that the MPC is solely responsible for setting monetary conditions, thereby discouraging any future attempts to encroach on its independence.

*Assuming a monthly payment of £3.9 billion in June, the same as in April and May.
**The Treasury’s schedule implies a total payment of about £36 billion in 2012-13, comprising a transfer of £23.8 billion accumulated up to end-March 2012 and income in 2013-14, estimated here at £12 billion.