Treasury Committee
Oral evidence: Re-appointment of Sir Dave Ramsden as Deputy Governor for Markets and Banking, Bank of England, HC 785
Monday 24 October 2022
Ordered by the House of Commons to be published on 24 October 2022.
Members present: Dame Angela Eagle (Chair); Rushanara Ali; Harriett Baldwin; Alison Thewliss.
Questions 1 - 59
Witness
I: Sir Dave Ramsden, Deputy Governor for Markets and Banking, Bank of England.
Witness: Sir Dave Ramsden.
Q1 Chair: Welcome to this Treasury Select Committee hearing. We are going to be considering the re-appointment of Sir Dave Ramsden as the deputy governor of the Bank of England for markets and banking. Welcome, Sir Dave. If you would like to introduce yourself, that would be a good start to the session.
Sir Dave Ramsden: I am Dave Ramsden, deputy governor for markets and banking. I have responsibility for the markets, banking, payments and resolution directorates at the Bank. I am on all three of the policy committees: the MPC, FPC and PRC.
Q2 Chair: I am going to spend a little bit of time on the mini-Budget and the U-turn. There has been perhaps more focus on your area of work, if I can put it that way, than usual recently. In your speech on 7 October, you said that domestic UK factors had driven the rise in gilt yields over the most recent period.
Could you outline your view of the recent trends in gilt yields before and after the appointment of the new Chancellor, perhaps before the appointment of the next one—we don’t know, do we?—and after the subsequent withdrawal of most of the mini-Budget and the resignation of the Prime Minister? If you could you take us through what you thought was happening and why, that would be helpful.
Sir Dave Ramsden: Do you mean in markets generally?
Chair: Yes, and particularly gilt yields.
Sir Dave Ramsden: As you say, I tried to set out the story from the perspective of at least one of the key market indicators we look at, the yield on 10-year gilts, in my speech of 7 October. I put a chart in there that showed the cumulative change in gilt yields over the year to this October.
From the start of this year, you can see global yields going up. You can see in that chart UK, euro-area and US yields all rising as it becomes increasingly apparent to the markets and to central banks, in terms of their reactions, that inflation is becoming more and more of an issue. Therefore, there is a combination of the fundamentals of inflation and the reactions of central banks.
At the Bank of England, we started tightening policy in December of last year. You have that steady move up through this year. If anything, the UK lagged slightly lagged behind the other two in terms of the cumulative change. When you get to about August this year, we are a little bit below. From August onwards, there was an emphasis on the need to tackle inflation. All central banks reinforced their messaging through August. In the UK, August was when we first did a 50-basis-point increase in Bank rate.
As I set out in my questionnaire answers, our communication became very focused on shorter-term guidance rather than longer-term guidance. That was our more immediate reaction function. Therefore, what you see in August is that our 10-year yields go up, if anything, more steeply than in those other jurisdictions.
At that time you also had the hustings and the whole process around the election of a new Prime Minister. That may also have been something of a factor. When you got into September, there was the announcement that there was to be a fiscal event. I think we learned on 16 September that it was going to be on 23 September. It was announced at very short notice, and it was going to come a day after our September MPC meeting, which is quite an unusual sequencing. At our September meeting, we increased rates by 50 basis points. I was one of three members of the MPC who voted for a 75-basis-point increase.
You have some focus from the gilt market on monetary policy. You can see what I have tried to draw out both in the chart of 10-year yields and in the Rigobon decomposition we did, which is an analysis that looks at what the influences on yields are. Typically, you will find that UK yields are more driven by global factors. We have a very liquid market, particularly at the 10-year benchmark, but it is pretty small by global standards.
As I have said, there were those global factors throughout this year, but there is a clear break in the trend from the fiscal event on 23 September. Our gilt yields, at that 10-year benchmark point but particularly at the 30-year point, went up very sharply. That is a much less liquid segment of the curve and of the market. I put a chart in that speech that shows, over the subsequent week, what was happening for UK 10-year yields. This is a particular decomposition of yields based on historic trends. It is a model, but it is suggesting that UK factors dominated, which is pretty unusual for the gilt market and in particular for the 10-year benchmark.
You have this backdrop of inflation becoming more of an issue globally, certainly also in the UK, and central banks responding. Bond markets around the world are responding to that, and there is the gilt market in the UK. You then have this fiscal event in the UK, which was clearly a discrete event that the market responded to. You certainly see it in the 10-year yield, but you see it very clearly in what happened to 30-year yields, which we can come on to.
Q3 Chair: What spooked them the most? Was it the lack of OBR costings? Was it the unfunded nature and the size of the tax cuts, which imply a huge increase in borrowing that was unfunded at that time?
Sir Dave Ramsden: Before the last five years at the Bank of England, I was at the Treasury for 30 years.
Chair: I remember coming across you there on occasion.
Sir Dave Ramsden: On occasion, yes. Both the run-up to the event and the event itself felt pretty unprecedented. Since 2010—I supported the then coalition Government in setting up the OBR—all fiscal events have been accompanied by an OBR forecast.
Before 2010, my experience was that very large changes in policy would be framed with some kind of forecast from the Treasury. Those forecasts varied in their credibility or the perception of their credibility—that was one of the reasons the OBR was set up—but you would always have some framing for very significant policy changes.
Q4 Chair: And not least a fiscal rule as well.
Sir Dave Ramsden: You would always have some kind of fiscal rule. What we saw in the run-up to 23 September was confirmation that there was not going to be any kind of OBR forecast. We did not quite know what the status was going to be, what was going to be announced on 23 September or in terms of when the OBR might be going to opine. Under statute, the OBR has to do two forecasts a year. It has not done one since March 2022. It is a long time that we have not had an official fiscal forecast.
Through that week—remember that the Monday was the Queen's funeral—you had a build-up of speculation about what was going to be in the fiscal event. We had some briefing from the Treasury representative at the MPC about what she thought at least one or two of the measures would be, but quite a lot of the detail only came out on the actual day, on 23 September. As I described, this was done very quickly. We literally only found out the Friday before that it was going to be on 23 September.
For me, the run-up to it felt very unprecedented and very unusual. On the day we had a fiscal scorecard—that was included in the growth plan—but it only really showed tax cuts. It was minuses on the scorecard cumulatively adding up to £45 billion. The IFS came out very quickly on the day saying that was the biggest tax giveaway since 1972.
One thing that struck me as a former Treasury official was that you only had three pages on the economic and fiscal context. Annex B of the growth plan had five pages listing all the infrastructure projects that were going to be accelerated. It did not feel like that was an appropriate framing.
The document also said there would be an OBR forecast before the end of the year and that it would be framed by the fiscal rule. You had very little detail of how this fiscal event was going to be contextualised, how it was going to be financed. You did have an updated DMO gilt and financing remit for an additional £72 billion—that was a number that was included—taking the financing remit up to about £233 billion. That included £60 billion or so of gilt sales and £10 billion on Treasury bills.
You had to have that detail to give the gilt market some sense of where things were going. I would have to say it was extremely thin on detail and context for what was such a significant fiscal event, and the market reaction was immediate.
Q5 Chair: Given that the toddlers who had taken over have now resigned and the mini-Budget itself has now been all but withdrawn, what effect is that having on gilts? What permanent damage might that foray into unreality have had?
Sir Dave Ramsden: I have the numbers somewhere. In terms of where the 10-year bond yield is, the figure we have been talking about, on the day before the mini-Budget it was at 3.55%. It is now back down at 3.8%, having peaked significantly higher than that. You could argue we are quite close to a round trip over what has been a pretty turbulent few weeks. We are almost back to where we started after we made our MPC announcement on 22 September.
To get back there you have had to have a whole sequence of policy announcements from the Government, culminating with the announcements last Monday by the new Chancellor. Meanwhile, we have had to do a very significant financial stability intervention—
Chair: Yes, in the pensions market.
Sir Dave Ramsden: We did that to deal with the dysfunction we were seeing in the long end of the gilts market, which was driven by LDI pension strategies but which was also very apparent from 23 September. There is an old adage that credibility is hard won and easily lost. When you look at yields in the gilt market, that credibility is being recovered at least on that benchmark measure. That has to be followed through. A return to stability around policy making and the framing of fiscal events will be really important.
I would just like to add one thing. I mentioned the briefings we got from the Treasury representative on the MPC. I have made some comments about the budgetary documentation. One thing that has been very striking for me in moving from the Treasury to the Bank of England is that the policy committees at the Bank of England are responsible for everything they produce. The MPR that we publish next Thursday will be signed off by the MPC. As Sir Jon Cunliffe was saying to you last week, at the Treasury officials advise and Ministers decide. The details of how Treasury documents were put together would ultimately not be an official decision.
Q6 Chair: If Ministers go rogue and all these rules get ripped up, we end up where we were after the mini-Budget, which was a growth plan and not a Budget, but actually was a Budget.
Sir Dave Ramsden: It was definitely a Budget, but it only had one side of the fiscal arithmetic in it. I was talking about the importance of sustaining credibility. What we are going to get on 31 October will be very important in that respect. My sense is that is going to take account of all the recent announcements on the revenue side but also the spending side.
Q7 Chair: The next MPC meeting is going to take place just three days after the fiscal statement on 31 October. Last week your colleague Sir Jon Cunliffe said he would expect the Bank to be fully briefed on the medium-term fiscal plan. Is this happening? Are you being briefed?
Sir Dave Ramsden: Yes. We have not started the MPC round yet, which is why I am able to be here, but we have started putting the forecast together. We are already engaging with Treasury officials, who in turn are engaging with the OBR on the elements that will go into the 31 October announcement. What is particularly important for us, which I stressed in my 7 October speech and Jon stressed to you last week, is what the new energy price guarantee will look like.
Q8 Chair: I was just going to ask you about that. We have gone from a two-year scheme, which was fairly known about although difficult to cost, to six months and then total uncertainty thereafter. How will you be able to price that into your calculations?
Sir Dave Ramsden: We have that clarity over the next six months, and we therefore know, compared to the previous scheme, what the fiscal consequences will be, depending on where gas prices end up, based on gas futures at present.
The Chancellor said last week that there would be a continuation but it would be more targeted. We will wait and see what is announced on the 31st. To the extent possible, we will have a little bit of time to take account of that before we make our decisions later next week. That will be a key element, because it will have a bearing on the path for inflation, which is critical. We will also need to look at how much additional support, relative to what we were assuming at the time of the September MPC, there will be for households at different points in the income distribution.
There are an awful lot of moving parts, undoubtedly, but we are in a position to do the best job, through our forecasts, of taking account of where the Government get to by next Monday.
Q9 Chair: With a new Prime Minister and what is effectively a new Government, there has been a lot of talk that 31 October may be too soon to have the medium-term fiscal statement. To what extent might a delay to that cause more damage?
Sir Dave Ramsden: It is always a judgment, and it will be for the Government to determine the timing and content of the fiscal event. You have heard the points I was just making about sustaining credibility in the gilt markets, given how much financing has to be carried out. I gave you the numbers. You are taking evidence from Robert Stheeman and DMO members later in the week.
Chair: On Wednesday, yes.
Sir Dave Ramsden: On the one hand, getting clarity about the fiscal arithmetic and the wider economic context, as the OBR sees it, will be really important. If that is available by next Monday, it will be really important. As I have said, there has not been an OBR forecast since March. It is not for me to judge whether there is a case for delaying it. We always go on announced fiscal policy and we always go on announced dates.
Q10 Chair: Faisal Islam has reported that officials involved in financial stability felt obliged to educate some very senior Ministers. To what extent do you feel that, during the recent crisis, the Treasury or its Ministers might not have been fully appreciative of the risks they were running?
Sir Dave Ramsden: As I mentioned earlier—I probably would say this as a former Treasury official—I am very confident in Treasury officials. I do not see any of their briefings, but I would be incredibly surprised if they had not briefed Treasury Ministers and other Ministers about the potential risks. I have seen that some of the more informal advisers to the Prime Minister had also tried to provide briefings.
Given what I have described and how the fiscal event unfolded, one could certainly predict that there would be a market reaction and market instability. That is very different from financial instability. You talked about this at length with Jon, Andrew and Sarah last week. Even going into that weekend after 23 September and into the Monday, we were very focused on market conditions. We had someone monitoring Asian markets overnight on the Sunday, which we tend to do when we are worried. We did not see anything that we thought was going to trigger a major financial stability issue through the course of Monday.
On Monday 26 September, if you recall, we had the statement from the Chancellor that gave a date for the autumn fiscal event and made clear that it was going to be on 23 November, at that point, and that there would be an OBR forecast. It set out more about fiscal rules. That was clearly done to give more information than there had been in the Friday document. The Governor also put out a short statement.
After those statements, I can remember thinking, mid-afternoon, “Okay, there is still quite a lot of volatility,” but it was really in the last hour of markets that we saw the sell-off, particularly at the long end. As I have said, the 30-year-duration gilts are very illiquid, but we were also getting market intelligence that suggested that the LDIs were having to sell and we were therefore potentially beginning the forced sale dynamic that would be a financial stability risk.
That evening I texted a colleague saying, “I am worried that we are looking at a homegrown dash for cash,” but I had not been worried about that on that morning. We were picking up the market intelligence from the LDIs on the Friday and into the Monday. They wanted to let us know that things were a bit choppy. Andrew Hauser gave you a more detailed account last week. It was really the end of the session on that Monday. The market was thin, and yields moved a lot, probably from only one or two funds selling off. The illiquidity is such that you can have that kind of effect. That was really unnerving.
I talked to my Treasury counterpart that evening. We agreed that we really needed to focus on this. We had been in close touch already just on market conditions, but those movements really focused minds. We were developing our options around then.
Q11 Alison Thewliss: I have some questions concerning independence and the Financial Services and Markets Bill particularly. In your response to the questionnaire, written before 23 September, you said, “I do not think that the Bank’s operational independence is currently under threat.” Subsequently, have concerns over Bank of England independence played a role in the volatility in sterling gilt yields that we have seen?
Sir Dave Ramsden: Yes, I made that comment in my questionnaire answer. I seem to recall that I sent the questionnaire in on 22 September.
Alison Thewliss: These things happen.
Sir Dave Ramsden: That comment was particularly about whether our independence for our monetary policy goals was under threat. Is your question more about whether independence for some of our other responsibilities is under threat?
Alison Thewliss: It was more around whether external concerns about independence had any impact on volatility.
Sir Dave Ramsden: I have talked about how the cumulative increase in our benchmark 10-year yield had been a bit lower than for US and euro area since last October. Through August, it picked up. The lines for those two things crossed in my chart. It is possible. It could just be due to having more of a focus on the MPC and what we were doing about inflation. It is possible that there were the beginnings of a risk premium being built in around perceptions of UK economic institutions, whether that be the Bank or the OBR. There were lots of reports that the OBR was going to be sidelined, and subsequently it did not have a role on 23 September.
There were questions raised about the Bank’s performance. I address those in my questionnaire. Given where inflation is, it is quite right that we should be challenged and put under scrutiny. When you look at the track record of the MPC since independence, if you take the exact 25-year period from May 1997 to April this year, inflation was almost exactly 2%, which is the symmetric target. There had been a whole set of shocks over that period, some of which were benign shocks that supported inflation staying low, like China.
It is important to remember this. We are dealing with an incredible period at the moment with a lot of negative shocks, but we have benefited in economic terms from some positive shocks at some times in our history. The track record and the evidence globally show that you need to get the framing right for how you give operational independence to central banks. Symmetric inflation target has certainly worked well in our case. We have some flexibility around how we have to hit that.
I would say we have built up a reasonable degree of credibility as an independent monetary authority since 1997. We are being challenged at the moment by what is happening to inflation, so it is right that we should be scrutinised and held to account, like today.
Q12 Alison Thewliss: Do you see it as part of your role to defend the Bank’s independence and price stability remit?
Sir Dave Ramsden: Our independence comes from the Bank of England Act, so ultimately from Parliament. We have a part to play in describing what is happening, explaining why we are or are not hitting our inflation target and the extent to which we are achieving our other objectives, but our independence comes from the Bank of England Act and the remit that was set, and that is annually updated by the Government. Ultimately, therefore, it comes from you in Parliament. You could take that independence away from us.
That accountability is the key support or foundation for independence, and also being transparent about what we are doing, whether we are managing to hit our target, whether we are not hitting the target, as at present, and explaining why we are not hitting the target. Ultimately, we have been given, as I say in my questionnaire, really significant powers. We should be held to account for how we exercise those powers.
It is one thing to explain to Parliament, but we also have to be able to explain to households and businesses. Ultimately, they need to believe us. They need to believe we will hit the target so that their behaviour—what actually happens in the real economy—will over time be consistent with getting inflation back to target.
Q13 Alison Thewliss: Looking at the double-digit inflation we have, does people’s experience of the real economy erode public trust in the Bank? The Bank seems almost unable to get that down.
Sir Dave Ramsden: We have to communicate and double down on our efforts to explain why inflation is above target. I was referring earlier to the series of negative shocks that have hit the UK economy, and I was clear that there have been times during the MPC’s history when we have also been hit by positive shocks.
I have given two speeches on this subject this year, one in February and one in July. We had the pandemic, the aftermath of the pandemic, Russia's invasion of Ukraine, what has happened with labour market participation, and the most recent shock in terms of fiscal policy and the financial market turbulence that has been generated. All of these things, to differing degrees, have made it harder for us to communicate and explain and have ultimately made it harder to hit the inflation target.
By far the biggest, I would argue, is the energy price shock that we have experienced both in the build-up to and then during Russia’s subsequent invasion of Ukraine and what we have seen since. We have seen the most recent very disturbing news in terms of where that potentially leaves not just energy prices but also, more generally, uncertainty in terms of the outlook, what that means in terms of businesses’ ability to plan ahead and inflation. What is going to happen to interest rates and what is happening in financial markets are both very important, but there are these other factors that the economy is having to deal with and we are having to deal with.
Going back to your point about trust, I would hope that people right across the economy will understand the factors that we are dealing with and why those have driven inflation above target. I hope they will believe us when we say we will do whatever is necessary to get inflation back to target. If they do not believe us, it is going to be a lot harder to get inflation back to target.
Q14 Alison Thewliss: It is, yes. I would agree. Moving on to the Financial Services and Markets Bill, you mentioned there that the Bank has its independence and Parliament could take that away. The Government intend to amend the Financial Services and Markets Bill so that they will be able to direct the regulators to make, amend or revoke rules where there are matters of significant public interest.
Last week Sir Jon Cunliffe told us that, if the amendment allows the Government to do so due to the public interest in the areas covered by your primary and secondary objectives, that could not be squared with being an independent and credible regulator. Do you share that concern?
Sir Dave Ramsden: I do, yes. Jon was very clear that we have yet to see the amendment. We will have to see how things pan out. I would want to stress, as Jon did, that we were very supportive of the whole future regulatory framework review that was carried out, which is incorporated in the Bill that has been introduced to Parliament as it stands.
When we were in the EU, we were in an unusual position relative to other regulators, in that many of our approaches and regulations had to be hardwired into legislation, often primary legislation. As a result of Brexit—this is now going to be implemented through the Bill—we will be able to take on responsibility in a more flexible and nimble way for setting those rules.
Going back to where you started, it is incredibly important that we are accountable to you and to wider Parliament in relation to how we go about that new rule-making power. It is another power we are being given. It will be very important to explain why we are doing what we are doing.
I will not be able to do justice to what Jon said last week, but he was very clear that you might want to have an intervention power for, say, national security. That is fine. From my perspective, I can see why that might override my views on a particular financial institution or a particular part of financial regulation. If it is a more general national interest override, we consider our mission of monetary and financial stability to be in the national interest. We have seen what happened at times such as the global financial crisis, when we saw the results of poor regulation and excessive risk-taking and what that did in terms of reinforcing the economic slowdown. That clearly was not in the national interest.
The nervousness we have is around the fact that we think what we are doing is in the national interest. I have mentioned the remit we have on monetary policy, which is set by Parliament. We have a primary objective, which is the safety and soundness of firms. We have a secondary objective for competition and we are going to have one for competitiveness. We have “have regard”s. We are trying to trade those off with each other and take account of that ordering of objectives.
If there is the potential for a governmental intervention where they have a different interpretation of the national interest and the trade-offs between those objectives, that risks challenging our responsibilities. In a sense, there is a question about whether we can still be held accountable for what we are doing, if the Government are coming in and saying, “That is all very well. That is your interpretation of the national interest. Here is ours.”
This is all a bit hypothetical because we will have to see what is in the amendment when it is tabled. I hope I have not missed it being tabled yet. We will wait and see what comes.
Q15 Alison Thewliss: That definition of the national interest that you speak of is absolutely key to that. I am sure the former Prime Minister and the former Chancellor thought what they were doing was in the national interest, and it turned out perhaps to be quite otherwise. In that kind of scenario, where would it leave the Bank if it were overruled?
Sir Dave Ramsden: We are getting into hypotheticals. Literally, we will have to see what happens. We will have to see what happens and how it then works out in practice. Given the uncertainties, honestly I would not want to speculate. I have set out what my position is in principle.
Q16 Alison Thewliss: That is fine. You mentioned earlier your own length of service in the Treasury prior to the role you are in just now. With Sir Jon and two members of the OBR’s Budget Responsibility Committee, you have all spent a lot of your careers at the Treasury. Does that have an impact on how independent institutions look and feel to those looking at it from the outside as well?
Sir Dave Ramsden: Do you mean if you have lots of ex-Treasury people?
Alison Thewliss: Yes, if you have the same people moving to slightly different jobs and moving around the system in that way.
Sir Dave Ramsden: There is a balance to be struck. I talked about this at great length in my 2017 questionnaire when I was appointed. I thought my experience could be relevant to joining the Bank. It has turned out to be quite relevant recently, perhaps in ways I was not necessarily foreseeing.
It is really important to get in people with diverse backgrounds and careers as well as approaches. As you point out, you have Jon and I, who both have Treasury experience, as Bank deputy governors. If the concern is, for example, that you might have groupthink, if you look at the MPC’s votes, every single vote probably since last June has not been a unanimous vote. That is June 2021 onwards. I would be surprised if that were not the longest run of votes where you have someone in the minority.
I have been in the minority quite a few times; I know Jon has at least once. You certainly have that diversity within that one committee. We could talk about the other committees, but that one has votes, so you can more clearly draw it out on the Monetary Policy Committee. You have a diversity of views. We are dealing with a period of huge uncertainty, so it is perhaps not surprising that you have that diversity of views. The good thing about our system is that it enables you to articulate those views through your vote and then to be accountable for that.
Although you have quite a lot of Treasury officials in different places, it makes sense at the OBR. They are responsible for assessing fiscal sustainability. When we set up the OBR back in 2010, we wanted to build up more of a debate around fiscal policy and a capacity around fiscal policy, like there is around monetary policy. We wanted more conferences and more debate, which would give you more bench strength for people coming in and out of the OBR.
Richard Hughes, who heads up the OBR, was at the IMF for many years. He has that diversity of background. There are lots of other former officials from other Government Departments who fill up other institutions. I would not be able to itemise them now.
Q17 Harriett Baldwin: Sir Dave, this is your re-appointment hearing for your role as deputy governor for markets and banking. I wonder, in that role, whether you think it would be good to have the re-appointment of Sir Tom Scholar at the Treasury?
Sir Dave Ramsden: I could comment on that, but I do not think it would be appropriate for me to.
Q18 Harriett Baldwin: I just thought I would try to get that one in. Let us go back to 23 September and the Bank’s response to the liability-driven investment episode. Can you talk us through the specific role that you as an individual took? We heard from Sir Jon Cunliffe, Andrew Hauser and Sarah Breeden last week. I just wonder what your role in all that was.
Sir Dave Ramsden: Andrew Hauser is one of my executive directors. I had three main roles. I supported Andrew and his teams in thinking through the design of the operations at each stage, whether those were the ones we ended up doing on 28 September or how we developed things subsequently.
Q19 Harriett Baldwin: Did you think about that over that weekend or was this on the Monday?
Sir Dave Ramsden: We had done some contingency work on how you would go about doing a financial stability intervention, if you did need one, in terms of working through the governance. I will come back to that in a minute. I have responsibility for the balance sheet, which meant I had to get involved in the governance as well as in supporting and making decisions on the operations.
To go back a little bit—Andrew Hauser said a little bit about this—ever since the dash for cash back in 2020 we had been concerned about illiquidity in different parts of the non-bank financial institution system. Andrew Hauser, as he mentioned to you last week, has led some international work on how you might go about designing repo-type operations.
One of the problems we have is that nearly all of the institutions, or many of the institutions, that have access to our balance sheet through the sterling monetary framework are not in the NBFI world. Thinking about how you get to them is quite tricky. Some of the interventions we have done over recent weeks have tried to overcome some of those difficulties.
I had three main roles. The first was supporting the teams doing the hard work on designing the interventions and then making the decisions on the scale, the pricing and how we were going to communicate it. The second was having quite a lot of engagement with the Treasury, partly because of my previous role but also to make sure our operations and interventions would, for example, fit with other things that were going on.
The third and key thing—this comes on to the governance—was about making sure we would be indemnified if we ended up doing asset purchases.
Q20 Harriett Baldwin: This was all happening on the Monday, was it?
Sir Dave Ramsden: Yes. All of those three elements were going on from the Monday into the Tuesday. As I said earlier to Angela Eagle, I was in touch with my Treasury opposite number late on the Monday evening.
Harriett Baldwin: Are you able to name who that interlocuter was?
Sir Dave Ramsden: It is my successor as chief economic adviser, Clare Lombardelli. I hope she won’t mind me—
Chair: Well you’ve done it now!
Sir Dave Ramsden: She was very responsive throughout. We had been in touch. She is the Treasury representative on the MPC. She had been very engaged with us the previous week. I had been in touch with her over the weekend.
As I mentioned earlier, because 30-year yields in particular blew out late in the session on Monday, we talked that evening about the worries that we might have to make an intervention and the options we had.
Harriett Baldwin: This is all after 23 September.
Sir Dave Ramsden: Yes, this on 26 September and into 27 September. We had a bit of respite on the morning of 27 September. I was worried that yields were going to rise again because they had done in some other markets. There was some global news—I cannot remember what it was—and they fell back a bit on the Tuesday morning.
The momentum picked up again through Tuesday, so we worked up various options. As was described to you last week, we did look at whether we could do a repo operation, but the investment funds were trying to de‑lever. They did not really want to take on more leverage. There is also the issue of whether you can actually get at them. There were so many involved in these pooled funds, as opposed to the segregated funds. How do you get to the people behind those funds, who are using those pooled LDI strategies?
We concluded in the course of Tuesday evening that it was not going to be possible, so we had a big meeting with the Treasury very late, probably early on the Wednesday morning, where we said what we were going to do. Then we had to work through the night to develop the various elements and to make sure that the Treasury was on side, so that it would give us the indemnity that we needed.
We can come on to talk about QT, but monetary policy is very much directed at tightening policy, whether through Bank rates or, in the background, through QT over time. It was incredibly important that we designed a targeted and time-limited scheme. We worked very hard on the communications on Wednesday morning. We had done the rationale for the scheme overnight. The Treasury was comfortable with that, so provided us with the indemnity of up to £100 billion.
Q21 Harriett Baldwin: Is that indemnity still in place, or has it been unwound?
Sir Dave Ramsden: No, it is still in place.
Harriett Baldwin: The Treasury is on the hook to the Bank of England for £100 billion.
Sir Dave Ramsden: The indemnities are obviously far greater than that on the APF—the asset purchase facility—as a whole. For this set of operations the maximum was £100 billion. We only did £19.3 billion. I say “only”. It is still a very significant number, but it is much smaller than the £850 billion or so that we have in the APF for QE.
Q22 Harriett Baldwin: How long does the indemnity last for?
Sir Dave Ramsden: It was sent to the Chair of the TSC and to the PAC. It is in place.
Q23 Harriett Baldwin: Yes. Do you know how long for?
Sir Dave Ramsden: It is in place until it is not in place. We need to work through the modalities of this. If I can interject a lesson from this, I gave a speech on 29 September, the day after we announced the scheme. We had very careful communications, as I said. We were crystal clear in that announcement that the scheme would end on 14 October. I said it again on 29 September. I was meant to be in Lithuania giving a speech. I ended up having to do it virtually, because I was working on the details of the intervention here.
On 29 September, I said that it was going to end on 14 October. I wish I had just given a speech that repeated endlessly “This is going to end on 14 October.” One thing was that it took a long time for that message to land. Back to the context of QE, we stressed that this was targeted and time-limited. It was backstop pricing. It took quite a while for some parts of the market to realise that this was not QE, so we put out another communication on 3 October. Then there was all the redesign and enhancements we did on the 10th and the 11th.
Q24 Harriett Baldwin: Slightly stepping back from that moment and looking at the evidence that we had from Sarah the other day about the work that the Bank did back in 2018 on flagging the liquidity risks that liability-driven investing could potentially experience, with your FPC hat on, on reflection, should you have done more to follow up on the topic and mitigate the risk to financial stability, given that we were moving into a bear market?
Sir Dave Ramsden: As Sarah set out last week, in 2018 we stress tested them to, I think, 25, 50 and 100-basis-point pretty much instantaneous moves in yields. Those were significant stresses. It relates to a point I was making earlier: we have entered an unprecedented period for new shocks.
Q25 Harriett Baldwin: Did anyone think before 23 September happened that, given rates were rising and you had tilted towards quantitative tightening, these risks that you had flagged in 2018 were increasing quite significantly?
Sir Dave Ramsden: We have been flagging throughout this year on the FPC that there has been a change in the environment. It is where I started this hearing. We are now dealing with an increasing focus on the need to tackle inflation. That inflation is due to shocks that are hitting the advanced economies, primarily. That has created a world in which yields are rising.
I have talked through the evolution of yields in different markets over the last year. I still think 100-basis-point instantaneous stress was pretty much off the scale, in terms of historical experience, even up to this September. Now we are in a position where the investment funds have built up resilience to a 200-basis-point move relative to 14 October. If you like, we have encouraged them to do that.
Q26 Harriett Baldwin: I am trying to see what was going on ex ante, as opposed to ex post. In terms of this strategy that a lot of pension funds were using, do you think that it is a good idea for them to be using leverage in this way?
Sir Dave Ramsden: We had a 130-basis-point stress over three days, which showed that, in those kinds of circumstances, they did not have enough resilience. There is a leverage strategy, as a pension fund and as the investment fund that is running it, where you have done the appropriate stress testing. I do not think you can take leverage out of the system altogether, but you have to be mindful that the world has changed, which is your point, and query if you have enough resilience. They have now built up resilience to a greater level than they had. Meanwhile, they have had to sell a lot of assets and put in a lot of capital, so that has been very challenging.
Q27 Harriett Baldwin: That is a stronger buffer. You mentioned earlier some of the non-bank market players and their leverage. Are you comfortable that the ongoing work that you are doing on the leverage in that space is progressing fast enough?
Sir Dave Ramsden: We have been driving this agenda internationally, supported by other jurisdictions, since actually before 2018, but the 2018 work and the subsequent dash for cash, as I have flagged, showed vulnerabilities in the US treasury market and in our gilt market as well. We have highlighted issues with certain hedge fund strategies, with open‑ended funds, with money market funds. The FPC has been very forceful in stressing the need to develop that work.
Unfortunately, from a UK perspective, we had to deal with the shock of the last month. That will have been a wake-up call to other jurisdictions to make sure that they will look into every part of the NBFI, look for leverage, look at the degree of resilience. Are the capital buffers there to ensure that they can withstand an idiosyncratic shock like that? Back to where you started, we are in a world where we are now having to deal with inflation. We are seeing much more volatility generally in these markets that used to be seen as very safe. They have experienced more volatility, but also we have been seeing trend increases in bond yields this year.
Q28 Harriett Baldwin: On that topic, I will go on to the second subject. In that context, are you comfortable with the approach that has been taken to quantitative tightening? Are you comfortable that the gilt market has the resilience to take not just the passive maturities of quantitative tightening but the ones that you are actively going to be selling?
Sir Dave Ramsden: It is a really good question.
Harriett Baldwin: I have been banging on about it.
Sir Dave Ramsden: No, these are really important issues, so it is right to challenge us and hold us to account on them. I gave evidence to you back in May about how we were going about the programme to make sure it is as predictable and deliberate as we can make it.
Directly to your point, though, it is worth bearing in mind, as I mentioned earlier, that what we saw on 23 September—we will get an update next Monday, perhaps—was that the DMO’s gilt issuance programme was revised up by £60 billion or so for the remainder of this financial year. We announced last Wednesday—was it the 19th or the 18th?
Q29 Harriett Baldwin: I think it was the 22nd. The 22nd was the original decision at the MPC and then there was the announcement about not including the 30 years. I think that was last week, yes.
Sir Dave Ramsden: Sorry, I meant last week’s announcement on QT. We are only going to be selling shorts and mediums. We are not going to be selling longs. We are doing £6 billion-worth of auctions in total through to the end of this year. That is like probably two average DMO auctions against the £60 billion increase that it has. I feel as if there is this issue of whether the market can digest what we are doing. I think we have given it quite a lot of notice.
Q30 Harriett Baldwin: Do you think you are doing the maximum you possibly could do? Arguably, if you did more, you would not have to raise the base rate so much.
Sir Dave Ramsden: That is except that—and this is something I strongly support—one of the MPC’s three principles is that Bank rate is the primary tool. Although I am one of the MPC members that thinks that QT has a tightening impact at the margin—I put this in my questionnaire—I see it as in the background.
The MPC decided that it wanted an £80 billion programme of QT over the next year. It voted on that at the September meeting. On 28 September, the executive, along with everything else we were doing, decided it would be prudent to postpone the start of that from the week beginning 3 October. It is now going to start, as we announced last week, on 1 November. It is going to total around £6 billion by the end of this calendar year. We are doing eight auctions in the short and medium buckets over the next two and a half months.
Q31 Harriett Baldwin: Did I read somewhere that the Treasury now is making loss on the former QE and is going to have to write you a cheque for £12 billion? Is that correct? It is going to have to send you funds to underwrite the losses on the bonds that you hold. Is that right? Could you explain to the general public what is going on there?
Sir Dave Ramsden: It is where my past catches up with me and I have to try to explain it to the general public. Quantitative easing started in 2009. There is obviously a portfolio of assets that are earning a coupon. The APF, where the assets are held, borrows the assets from the Bank and has to pay Bank rate on those assets. For most of that period, the coupons were significantly greater than the rate that was being paid.
Where my past catches up with me is that in 2012, I think it was, it was agreed between the Treasury and the Bank that the money, rather than being held by the Bank, would be swept back to the Treasury. A total of £120 billion has moved in that direction.
Q32 Harriett Baldwin: That has stopped and now it is going to have to be swept back your way, is it not?
Sir Dave Ramsden: Yes, because Bank rate has risen relative to the average coupon on the portfolio. The Bank of England is going to receive cash flows coming in the other direction, yes.
Q33 Harriett Baldwin: Is any work being done between the Bank and the Treasury about any changes to that approach, or is it now set in stone that that is how it works?
Sir Dave Ramsden: That approach has been set in stone, as I say, since 2012. Before that, ever since QE started, the Bank had been indemnified for its asset purchases, because it has a very small amount of capital itself and would not be able to support asset purchases on anything like that kind of scale. What was announced in 2012 was this transfer of the accumulated gains, as it were, to the portfolio going back to the Treasury. What happened, and what you will have seen, is that the Treasury had to publish an autumn estimate with a written ministerial statement to explain to Parliament that it would have to make this transfer to the Bank.
Q34 Harriett Baldwin: Was that £12 billion?
Sir Dave Ramsden: At current yields, it is about £11 billion or £12 billion, but it will need to be updated depending on what actually happens to Bank rate and yields. Also, it will be affected somewhat by our own sales of assets and whether those crystallise a loss or a gain.
The Bank set out, in a Bank of England Quarterly Bulletin article in Q1 this year, a possible path for these flows back to the Bank. It showed the £120 billion that had gone cumulatively to the Treasury and then the possible flows back, which are highly uncertain, because they depend on where Bank rate ends up and what happens to yields. We have always been very transparent about this. My sense was that the Treasury, in submitting this estimate, was continuing that.
Q35 Harriett Baldwin: To clarify, there is no work and there are no discussions going on between the Bank and the Treasury on this methodology.
Sir Dave Ramsden: There is lots of engagement and the money will have to be transferred to us.
Q36 Harriett Baldwin: There is no questioning the methodology itself.
Sir Dave Ramsden: No.
Q37 Rushanara Ali: Good afternoon, Sir Dave. I want to pick up on some of the things that have been said already, and then I will move on to the wider issues around the economic outlook. There is what we have seen with the mini-Budget, and then of course you have touched on call-in powers and differences between how the Government might interpret public interest or national interest and the potential for these tensions to come to the fore for regulators. Then we have seen the spectre of the OBR being sidelined. We have seen, in effect, the Government finding a way to circumvent the institutional norms and rules that are there to protect our economy from what we saw, which was chaos.
Do you think that there is a need to think through very carefully how these institutions can interact with a Government that basically went rogue? There is every chance that what we saw in September could happen again. How do we make sure that that does not happen in the future, beyond restoring the strength of the institutions?
Sir Dave Ramsden: As I have set out, it was a very unusual fiscal event, both in the run-in to it and in the content of it. I imagine that it will stand as what you might call an event study.
Q38 Rushanara Ali: It is what not to do.
Sir Dave Ramsden: It is more that it will be a memory that people will carry around with them.
Q39 Rushanara Ali: It has basically cost a Chancellor and a Prime Minister in a matter of weeks. Do you think that is enough—that political consequences have been felt and therefore that will change behaviour going forward: future Governments will not act like that for some time to come and there is not a need to learn wider lessons around what needs to happen to ensure that these sorts of actions do not happen, that un‑costed announcements do not get made in this way, isolating the key players that ought to be included? In the evidence session with the deputy governor, we heard that the Bank was pretty much left in the dark.
Sir Dave Ramsden: As I have stressed, we were briefed to the extent that that was possible in the run-up to the fiscal event. It is worth pointing out the very unusual timing, both that a fiscal event is announced with a week’s notice and that it should happen the day after an MPC. The normal convention—the one that my successor follows and that I followed—is that you give a private briefing on the Budget if the Budget is the day before the MPC. The MPC needs to know, as it is planning its forecast, as it is putting together its decision making. As I have said, for me it was pretty unprecedented. It felt like a pretty one-off set of circumstances.
It is not for me to comment on the politics. There were lots of voices out there over August and September commenting on what was happening to institutions, led by this Committee. In a sense, the point I was trying to make earlier is that we have to be accountable for the powers that have been given to us as non-elected-politicians. We have to be accountable to you, so we look to you to provide us support and defence, if we deserve it, but equally to challenge us.
Q40 Rushanara Ali: We are very grateful for all the sleepless nights that mini-Budget cost you and your colleagues and for the actions you took.
The consequences of the mini-Budget are feeding through the system to this day. We have £5,500 annual costs to household mortgages, of which some have said the trust premium is £1,200 to the cost of UK home loans by 2024, to be exact. Some people might say, as Ministers have tried to, that there is a broader trend with interest rates going up, but there is that additional cost. Overall, the Bank said that, if it had not intervened, $1 trillion could have been erased from UK pension funds. The fact that the markets were spooked has meant that £12.5 billion a year has been added to debt interest bills, specifically because of this failed experiment of the mini-Budget under Prime Minister Truss.
These are consequences. We have not yet seen the plan that the new Chancellor is going to announce on Halloween, if he does on that day, or subsequently, but we are expecting austerity 2.0, so the consequences of the September mini-Budget are continuing to feed through. Some people may think that changing the faces at the top is suddenly going to fix things. Of course, there has been some reaction in the market.
Is it the case that, looking to the future, the institutions actually have been weakened, or does this episode show that the consequences are so grave for people who are in elected positions if they do not pay attention to the markets and do not include the institutions, such as yours and the OBR, that they are not going to try this again? Which direction do you think we are heading?
Sir Dave Ramsden: I did not recognise some of the numbers you quoted. Because things are moving quite quickly and we have seen so much volatility in markets, estimates can change from day to day, as I set out in my 7 October speech. Next week, with the 31 October statement and accompanying OBR forecast, I think we will see an attempt to put all of this together based on what will, hopefully, be some more stable markets by then. Equally, we will have a chance to put out our latest forecast on 3 November. It is worth saying, though—and this is what I have tried to set out in a few speeches this year and when I have appeared in front of you—that the situation was very challenging even before the mini-Budget.
Q41 Rushanara Ali: Yes, but it is the straw that broke the camel’s back, as one of the business representatives who came and gave evidence to this Committee pretty much said.
Sir Dave Ramsden: Bring it back to the fundamentals. There are the very adverse shocks that have hit the UK economy, particularly the energy price increases, which, because we are an importer of energy, have made us poorer as a country. If you think about both the weakness of economic activity that we are now dealing with and experiencing, and the very high inflation, you can trace large parts of that back to that energy price shock.
When you get poorer as a country, that means that the trade-offs and challenges that you face in policy terms are that much more difficult. We are experiencing that on the MPC. As I set out in my questionnaire, we are having to tighten policy while, at the same time, forecasting recession.
Q42 Rushanara Ali: That makes the point even more stark, does it not? The Government should have been all the more sensitive because those issues were well documented for months on end. In fact, as you say, this Committee raised the issue about the tension between the Bank of England needing to raise interest rates while the Government were likely to head in the opposite direction, from what we heard during the leadership contest over the summer. There was no respect or recognition of those external conditions. We recognise that, but it makes the point even more stark, does it not, about a lack of sensitivity to markets in the current economic climate?
Sir Dave Ramsden: We now have a Government that, certainly based on the announcement last week, are very focused on fiscal sustainability as well as sustainable growth.
Q43 Rushanara Ali: Yes, but they have come to that point having created havoc in the markets. Speaking of which, can you think of a time in recent memory when the Bank of England or any other institution described the Government’s Budget and their actions as posing a risk to financial stability? Can you think of a time when your institution or any others had to do that?
Sir Dave Ramsden: We have just been through a time.
Q44 Rushanara Ali: What about before that?
Sir Dave Ramsden: I can’t—
Rushanara Ali: No, exactly.
Sir Dave Ramsden: No, it is just that I can’t—going back through my long career, I am sure there were times when things that we did when I was at the Treasury created challenges under different Governments.
Q45 Rushanara Ali: Was that pre-Bank of England independence?
Sir Dave Ramsden: It may have been post. I am not saying everything was smooth when I was at the Treasury, but this created a financial stability shock, yes.
Q46 Rushanara Ali: And this was a set of Government actions. Those are the facts. You mentioned about numbers. It would be helpful for us to understand—if you can answer now that would be fantastic, or you could write to us—what the cost is. An FT analysis set it out as £12.5 billion a year added to the debt interest bill following on from the mini-Budget fiasco. If those numbers have changed, it would be helpful to understand what the additional cost is, because people want to know.
Sir Dave Ramsden: I understand people want to know, which is why I am saying that I think we will get a very comprehensive update when the OBR, which is responsible for calculating debt interest, publishes on 31 October.
This comes back to the point I made earlier about how things have not quite round-tripped but have got quite close to it, but there is still an increase. The 10-year gilt yield was 3.55% on 22 September. That is the close of the day of our last MPC meeting. At noon today it was 3.8%, so it is a bit higher, but obviously other things have happened in between. It is not just the mini-Budget. The two-year swap rate, which two‑year fixed mortgages are priced off, was 4.5% on 22 September. That was 4.7% at noon today. It peaked, as I set out in my speech on 7 October, at close to 6%.
That gives you a sense of how volatile things have been. Markets remain quite febrile. Things have not settled down yet and that is not just because of political changes. That is also because people will be trying to think what the MPC is going to do next and how challenging the fiscal environment is for the UK. There are big questions that remain out there.
Q47 Rushanara Ali: With respect, Sir Dave, this has been a disorderly period. We were being told, quite correctly, over a number of years, from the previous Bank of England Governor to the current one, that interest rates would have to go up over time, but gradually. But because of the wider international issues that we are all familiar with, inflation and so on, and the points that have been debated a number of times about the fact that inflation went, post pandemic, from transitory to not, there has been a need to increase, and this has added much more disorder to the way that has happened. That has caused a great deal of strain to people across the country, particularly those who have mortgages of different forms. The volatility is causing huge anxiety among our constituents. That is the reality of what we are dealing with.
I will come on to interest rates, but I want to ask you about inflation. The UK has the second highest inflation rate in the G7, after Germany. To what extent are the UK-specific factors a driver to inflation? You have touched on some of the international factors. Leaving those to one side, to what extent is it Brexit? Does Brexit play a part still? Is it labour market participation? The Government will tell us they have hit full employment. We know there are issues around healthcare and backlogs in people getting treatment, long covid and so on. What are the domestic factors that we need to get our head around, in terms of dealing with the inflationary pressures that are domestic-made, if you like?
Sir Dave Ramsden: One driver, if not the key driver for why the MPC has been responding forcefully, with 50-basis-point increases at the last two meetings, is the concern that inflation is becoming more domestically generated and more persistent. In the speech that I have flagged a couple of times, I flagged that, if you look at the drivers of inflation, energy prices were responsible for about 30% of inflation that we saw in August, when it was 9.9%, but that services prices were now contributing over 2% to inflation. Some of that may be the indirect effects of energy, but that shows that inflation is spreading out through the economy. We have a very significant service sector in the UK. It is the case that there is domestically generated inflation now, which is why the MPC is tightening policy forcefully.
Q48 Rushanara Ali: What would you attribute to those?
Sir Dave Ramsden: If you are a business, you have your labour force, which will be looking for increases in wages. You have your input costs—energy and other input costs. You will be having to pay your various rates and other things like that. If you are a householder you will be paying rent. There is a whole set of input pressures. If you are a business, you will be looking at whether you can retain your margins, whether you can restore them. There was a report in the FT today about the number of FTSE companies that are having to give profit warnings.
Because we are an importer of energy and many manufactured goods, which were driven up in price as the global economy recovered from the pandemic, what economists call a terms of trade shock has left us all poorer. We can import less with what we produce. You are seeing that adjustment happening in the economy, but, in particular, it is feeding through to higher inflation, so we are having to respond to that.
Harriett Baldwin: On a point of order, Chair. May I highlight for the record that, further to today’s developments, it is being reported that the UK 30-year gilt yield is roughly down to where we were on the morning of 23 September? I thought I would get that on the record.
Chair: Thanks for that added information. I am not sure we have points of order in Committees, but you got it in.
Sir Dave Ramsden: Your market intelligence gathering is better than mine.
Chair: Let us wait to see what happens after 31 October.
Q49 Rushanara Ali: I have a final couple of questions on interest rates. We appreciate that the Bank has that tool to get inflation under control and work towards a target, but it is not without consequence and it is now becoming even more painful with what has happened, as I mentioned, with mortgage holders and so on and the dramatic increase. There is also the tension between interest rates and what then happens to the economy. We were told by the Bank of England Governor in one of his appearances before the September mini-Budget event, I believe, that we were heading towards or already in recession.
You are between a rock and a hard place of trying to get control of inflation and keeping increasing interest rates. Is there a risk that we are going to face the worst of all worlds—that you are not going to be able to bring inflation under control and we are going to see interest rates continue to go up, putting even more pressure on people’s household budgets and our economy?
Sir Dave Ramsden: We on the MPC will take the necessary steps to get inflation back to target. We will have to deal with any further shocks that hit the economy, either adverse ones or benign ones. The history of the UK shows that, if you do not take the necessary steps, as we saw in the 1970s, when inflation averaged over 10% and Bank rate averaged higher than that, that does not provide the foundation for the kind of sustainable growth that we all want to see, because that is the best support for living standards.
On the MPC, I have every confidence that we will take the actions necessary. We are acutely aware of the impact of the actions we have already taken. Moving Bank rate up to 2.25% is still very low by historical standards, but it is obviously much higher than it was a year ago, when it was only 0.1%. We are acutely aware that, for the 30% of households that have mortgages, the vast majority of those now on fixed rate, as they have to refinance their mortgages, given where Bank rate and mortgage rate is now, that is going to lead to a significant increase in their payments.
As we discussed last time I was giving evidence in front of you, that is playing out already. In the very recent period, it has been because of the turbulence that we have seen those reference rates for mortgage rates spike very high. As I was saying, they have now come back closer to where they were pre the fiscal event. We have also seen a lot of mortgage products withdrawn from the market, because mortgage lenders were finding it difficult to price. I am very conscious of the anxiety that causes people who are trying to get a mortgage for the first time or are remortgaging.
That comes back to the importance of us achieving our remit on monetary stability, getting inflation back to the 2% target. That will mean that rates only have to be as high for as long as they have to be high for. That is the task that we have been given through legislation and we have to prioritise that. It is an incredibly difficult set of economic circumstances where we were forecasting the economy will be in recession by the end of this year, or entering recession by the end of this year. The data we saw this morning would be consistent with the economy being in recession. The PMI indicators and other household indicators are weak. This is an incredibly challenging environment.
If we do not get inflation back to target by taking the forceful action that we are taking now—it takes time to feed through, but it is already having an effect, as I have described—that would be worse for the economy. I do not underestimate how challenging it is.
Q50 Chair: I want to ask you a few very quick-fire questions on things that we have not picked up that we would like to cover. Are you worried about the impact on imported inflation of the devaluation of the pound?
Sir Dave Ramsden: Certainly we have to take account of it. We are an inflation-targeting central bank. We do not target a level for the exchange rate, but when sterling depreciates that feeds through into imported inflation, so it is a factor that way. Sterling has been relatively stable of late and is probably close to where it was around September, but it has fallen quite significantly.
Q51 Chair: The overall trend is down.
Sir Dave Ramsden: Yes, the overall trend is down through this year.
Q52 Chair: I want to briefly ask you about one of the Bank’s interventions to launch the temporary expanded collateral repo facility, which replaced your market operations to stabilise pension funds, to provide support beyond the end of the gilt purchases. Is this facility working as intended? How effective can it be, given that it operates via the banks, rather than by providing liquidity directly to the LDI funds that need it?
Sir Dave Ramsden: It will hopefully have a role. It has not been called on yet. Unlike our purchases of long-term bonds, it is continuing for another few weeks, until the first half of November. If it is required, it can be used. That was one of the two schemes that we worked up over the weekend of 8 and 9 October. That was another busy weekend. We felt it was appropriate to take in a broader range of collateral.
If the LDIs or pension funds wanted to offload corporate bonds, they could get cash from the banks and we, in turn, would take the corporate bonds on to our balance sheet. It is taking a bit of a risk with our balance sheet, because we went down to a quality of corporate bonds we had not gone down to before—lower quality—but, in the circumstances, I thought it was justified so I approved it. It remains there if it is needed. The corporate bond market has performed relatively well over the last few weeks. We have not seen spreads relative to risk-free rates blow out.
Q53 Chair: There was that frantic weekend you had, having to stay up all night to create facilities to deal with the liquidity problem in pension funds and general market dysfunction. You initially had to use your QE machinery to do things and then make it up as you go along to create something different, like the TECRF—your acronyms always stick in the mouth. Do you think that, given that there are other pools of illiquid stuff hanging around, as we move away from zero and low interest rates, you ought to have something more standing—some tools to use for market dysfunction that are not QE?
Sir Dave Ramsden: As I hinted at in response to an earlier question, we have been working with other central banks, looking at whether there are repo type tools, but then you have to get to these institutions. They are not necessarily the natural counterparts to a central bank. They are nearly always not members of, in our case, the sterling monetary framework.
We continue to work on those kinds of tools. I was pretty reluctant in this crisis to go down the asset purchase route. I was nervous because we are engaged in monetary tightening. We want to unwind QE.
Q54 Chair: One minute you are tightening and then you are loosening.
Sir Dave Ramsden: That is why we were very clear that this was for financial stability reasons. It was targeted and time-limited. It was a segment of the gilt market that we were intervening in. It was not a full allocation auction. It was not like a QE auction. The reserve pricing took a while. You said that we used QE. We did asset purchases, but we very much differentiated the product that we were offering, in terms of a purchase facility.
It took a while for the comms to hit home to some people in the market, but through the two weeks we were able to get there in the end. We were learning by doing, though—that is be the phrase I would use. Because the markets were so turbulent, we were learning about what the needs of the LDIs were. What did they need to do in order to maintain their solvency? That changed at different times according to where the yields themselves were. It would be fair to say it was quite a rollercoaster of a couple of weeks, in terms of trying to track our way through it.
Q55 Chair: There is probably a dark little bit of the pensions market that we might want to have a look at at some stage, suddenly discovering that that sort of leverage was being used there.
Sir Dave Ramsden: It is worth emphasising that the increase in yields that we talked about, in terms of the underlying pension funds, puts them in a better position, because it reduces their liability.
Q56 Chair: So long as they do not go bankrupt. This is the issue with leverage.
Sir Dave Ramsden: It was the investment funds that some of them were using that were the issue. They have been rebalancing throughout this year in response to the increase in yield curves that we have been talking about throughout this session. Typically, they rebalance over time. They might have quarterly mandates. They might do it more regularly than that, but they are actively managing their portfolios, given the challenges that they were facing. The pension funds themselves, because of where the yield curve has gone, are actually in a better position than they were.
Q57 Chair: Yes, I understand. I want to ask you about the Bank of England and HM Treasury energy markets financing scheme, which opened on 17 October. Which part of the Bank’s responsibilities justify involvement in providing this support at all?
Sir Dave Ramsden: I would say two or three things about that. The FPC has been very focused on the issues in the energy market. It was not clear that it got to the point of being a systemic risk that created a real threat to financial stability, but it was clear that the hedging strategies that energy companies have to use were coming under real strain. The margin calls that we were seeing that they were having to make because of the volatility in the underlying energy markets were putting their provision of the different services that they provide to the energy market under real strain.
Working with the Treasury, we have agreed to act as the Treasury’s agent. Through the CCFF, we have experience of assessing the credit risks of various companies. We are only using the existing financing facilities that these energy companies are receiving from banks. We are not introducing our own financing; we are just supplementing that. We have a guarantee from the Treasury. If we assess that one of these existing financing facilities should be supported by us, we have a guarantee from the Treasury, so this does not cross our balance sheet at all.
I will be honest: this is at the limit of what I would want to be doing as a central banker, but I saw the case for us supporting the Treasury in doing this. We have the operational ability to do it. We have developed enough of an understanding of the credit risks involved to do it. Again, it is a time-limited scheme that we introduced, amid everything else, last Monday. It is up and running. We will have to see if it gets used.
The pricing of the guarantees is not generous, as you would expect. It is there as a backstop. We saw some real problems for these companies involved in energy financing and so there was a public policy case. We were willing to work with the Treasury to come up with a solution.
Q58 Chair: We will keep an eye on that one. Finally, and completely unrelated, how would you describe the current status of the real-time gross settlement service renewal programme? That sounds boring to everyone else, but it is quite an important part of our financial structural system.
Sir Dave Ramsden: This is like 20 questions on the 20 answers I gave you to your questionnaire. This is the biggest programme that the Bank has ever done. It is a technology programme and it is the most important programme that we have done, because RTGS is the core infrastructure for the UK financial system. We had over £1 trillion cross it back in September. It averages about £700 billion a day, but we had over £1 trillion. Our high-value payments system, CHAPS, runs on RTGS. That is run by the Bank, as you know. We took it on in late 2017, just after I joined the Bank. This is hugely important to the UK financial system.
It is really important that, because it dates back almost 25 years, we ensure that, in renewing it, we do not trip up the existing system. As I set out in one of my answers, the new system is going to offer greater resilience, greater interoperability with other systems, and will enable more institutions to have access to our balance sheet, if you think of RTGS as the system we run the balance sheet over.
I have mentioned a couple of times that we have over 200 institutions in the sterling monetary framework, but for some of the things we have been talking about you might want to get a lot more non-bank financial institutions on to RTGS, for example. Then they could have access to our balance sheet. Obviously we would make very demanding requirements of them, but we could not do that under the existing system. The new system will be much more flexible.
Q59 Chair: It is on track and you are happy with it.
Sir Dave Ramsden: It is on track. I set out in my answer that we had to repurpose the timing somewhat at the beginning of this year in order to ensure that we were comfortable with the running of the new system as we develop it alongside the existing system. One lesson of these big technology projects is that you do the appropriate testing.
There is one challenge that we are going to face. I mentioned in my answer to that question that there is a lot of interdependency with what other jurisdictions are doing in moving to this thing called ISO 20022 messaging, which is the messaging standard that financial institutions use to communicate with each other through these different RTGS systems that countries have and for all their other systems.
Last week, the ECB announced that it is having to push back its move to ISO 20022 messaging from November to, I think, next March. That will create challenges for our go-live in April. We were due to go live with our own ISO 20022 messaging in April. We are engaging now with particularly the direct participants of the CHAPS system to work out what this change in the ECB timing means for us, but it may have some implications for our programme, whether we can go ahead on that key date of April 2023 or whether we might have to push ours back a bit. We had agreed that we would have air gaps of three months between us and the ECB.
It is a very salient, real-time question because of this news from the ECB. They have had to push theirs back because they were nervous about whether they could be confident of going ahead in November. They have had to push it back to next March. That could have knock-on effects for us, so I will report back to this Committee as appropriate.
Chair: Sir Dave, thank you very much for your wide-ranging and very detailed answers across the whole of your bivouac in the Bank. We appreciate your coming for this reappointment hearing. That is the end of today’s meeting.