Speaking at a Treasury Select Committee hearing yesterday (10 January), Breeden confirmed the central bank will be selling £100bn worth of gilts this year.

Former MPC member claims BoE will not be able to cut interest rates in 2024 – reports

Although she said the QT programme might have an impact on markets, as the sale of gilts could affect yields, Breeden argued this was a “relatively small” impact as the bank rate is the “main tool” used by the BoE to ensure the right monetary conditions exist in the economy.

She noted market functioning is taken into account by the monetary policy committee when considering the QT programme and, so far, there has been no impact on market functioning nor financial stability from quantitative tightening.

The only exception to this, Breeden noted, were the events which followed the Mini Budget of September 2022.

Since the central bank started its QT programme, she said there was “no evidence” it has created problems for markets or banks.

Overall, BoE governor Andrew Bailey showed optimism around the economy, restating the need for inflation to get back to the bank’s 2% target to maintain financial stability.

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He noted there have been some “mitigating factors” for the economy that had not been seen in past events, including the lack of a profound increase to unemployment – as it historically drives loan losses in the mortgage market – and a 2% increase in household real income last year, which is supporting financial stability.

Bailey added there is currently “less stress” in household borrowing and in the mortgage market, highlighting that the cost of living is “nowhere near as stretched as in the Global Financial Crisis”.

Areas of concern

TSC chair Harriet Baldwin asked the panel what their concerns were heading into 2024, which Jonathan Hall, external member of the Financial Policy Committee, answered by arguing that while volatility over interest rate rises has stabilised and, as a result, there should be less risk of financial instability, he was worried about the “risk of exuberance”, with investors taking on more risk if they see markets have calmed down.

Slowing growth was cited as a concern by Carolyn Wilkins, external member of the Financial Policy Committee. She said although the slowdown has not been “dramatic”, she feared it could lead to an uptick in inflation.

A slowdown in economic activity could also lead to further rises to interest rates, which, in turn, could impact financial stability, she argued.

Breeden added she was worried by uncertainty not being “properly priced in” by markets, which could increase risks associated with a market adjustment. She argued the risk environment feels “particularly challenging”, but also noted the “extraordinary circumstances” currently at play.

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Last, Bailey turned the spotlight on geopolitics and the risk it may pose to financial stability in 2024, as it could be a catalyst for further global shocks.