From 2009 until the end of last year, net asset purchases by major central banks — the US Federal Reserve, European Central Bank, Bank of England, and Bank of Japan — totalled about $20tn. That figure must come down. The big question is how far, and how fast.Following the financial crisis, central banks hoovered up bonds as part of quantitative easing programmes to stimulate demand-sapped economies. Then the pandemic hit, leading to a further bond-buying binge to calm markets. Central banks (with the exception of the BoJ) have been slimming their balance sheets this year via quantitative tightening: letting expiring bonds roll off their balance sheets, and in the case of the BoE, through sales.

When central banks buy bonds from banks, the latter receive a credit known as central bank reserves — the safest and most liquid financial assets. QT reverses the process, reducing liquidity in the system. Still, the Fed’s total asset holdings amount are equivalent to about 30 per cent of the US economy — just under $8tn — and the ECB’s, more than half the eurozone’s gross domestic product.

Maintaining too large a balance sheet leads to heightened financial instability — excess reserves distort the private market for liquidity provision, create dependence on the central bank, and, as Andrew Hauser, an executive director at the BoE, outlined in a recent speech, it can incentivise inappropriate risk-taking.