BoE's Vlieghe Says QE Unwinding Need Not Impact Yield Curve

Unwinding of Bank of England's asset purchase plan will not have a material impact on the yield curve, if done gradually with proper communication, Monetary Policy Committee member Gertjan Vlieghe said Tuesday.

Quantitative easing, or QE, affects the yield curve but it does so primarily by affecting expectations of future monetary policy, Vlieghe said in a speech at the Imperial College Business School, London.

He argued against the view that QE works primarily by pushing down long-term interest rates directly, through compressing the term premium.

According to Vlieghe, the main channels through which QE works is going to be very important when it comes to stimulus unwinding.

"Unwinding QE need not have a material impact on the shape of the yield curve, or indeed on the economy, if properly communicated and done gradually," Vlieghe said.

The banker noted that the yield curve was flat in the gold standard era. A "flat" yield curve tends to mean that long-term interest rates are at similar levels to short-term interest rates, he said.

Since the Bank of England's independence, the fundamentals of inflation and inflation risk have become more similar to the gold standard era than to the 20th century average, Vlieghe said. Hence, he expects yield curves to be flat again, on average.

The policymaker added that further communication on future guidance can be expected moving towards the date when QE unwinding is likely to start. The current size of BoE's asset purchase programme is GBP 435 billion.

In response to questions, Vlieghe said he sees one or two rate hikes a year.

Vlieghe also said the bank has not changed its baseline assumption on Brexit. BoE expects a smooth and orderly outcome, he added.