Why central banks will find it hard to reverse quantitative easing
- Central banks around the world have begun to shrink their balance sheets and liquidity seems to have vanished in the space of just a few months.
The malfunctioning of the government bond market in a developed economy is an early warning of potential financial instability. In the UK, the new government’s proposed “mini-budget" raised the spectre of unsustainable sovereign debt and led to a dramatic widening in long-term gilt yields. Recognizing the systemic importance of the government bond market, the Bank of England correctly stepped in, both pausing its plan to unload gilts from its balance sheet and announcing that it will buy gilts over a fortnight at a scale near that of its planned sales for the next 12 months.