Good morning. As a percentage of nominal GDP, the balance sheets of the Bank of England, the European Central Bank and the Federal Reserve are now at levels not seen since before the era of Covid-19 expansions. But the central banks’ experience of shrinking their balance sheets — a process known as quantitative tightening — suggests they may not be able to go much further, and nor do they really need to.

The Fed was the first to start normalising its balance sheet in 2017. Its first attempt ended in August 2019, only for a repo-market blow-up the next month to reveal that it had gone too far. Its second attempt has been more orderly, but to avoid another “repocalypse” it ended QT late last year.

The Bo E’s approach has been the most controversial. Unlike the Fed and ECB, it has shrunk its bond portfolio through maturities and outright gilt sales. As a share of GDP, its balance sheet has fallen by just over half from its 2022 peak.

But this may also have pushed up UK borrowing costs, with some estimates putting the effect as high as 0.7 percentage points. The Bo E will decide on September 17 how much further to shrink the balance sheet over the coming year. The ECB was the last to start quantitative easing and has also been the slowest to unwind it.

Its balance sheet was shrinking before it began QT, but mainly because banks were repaying crisis-era loans and nominal GDP was rising quickly. Its caution reflects the challenges of maintaining financial stability across a 21-country currency union. The era of large-scale asset purchases may be over, but large central bank balance sheets are probably here to stay.