The fiscal implications of recent monetary policy developments

This is a preview from the National Institute Economic Review, November 2016, no 238

Ahead of the forthcoming issue of the National Institute Economic Review (NIER no. 238) that will be published on Wednesday 2nd November, we release a series of boxes, each of them looking at specific aspects of economic policy in the post Referendum period.

This box, prepared by Simon Kirby and Jack Meaning, analyses the fiscal implications of recent monetary policy developments.

Changes in monetary policy have implications for the funding costs faced by all economic agents, including the sovereign. We utilise the framework of Kirby and Meaning (2015) to examine the fiscal implications from elements of monetary policy changes announced in August 2016: a 25 basis point reduction in Bank Rate to 0.25 per cent and, over a six month period, the purchase of £60 billion of gilts, expanding the stock of government bonds held by the Asset Purchase Facility (APF) to £435 billion.

Simon Kirby said: "Our analysis suggests that the policy measures announced by the Monetary Policy Committee in August are likely, all else equal, to have increased the net transfers between the Asset Purchase Facility and HM Treasury by around £2 billion per annum".