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The Bank of England is expected to sharply slow the pace at which it is shrinking its balance sheet, with some investors calling for a “shock and awe” suspension of all active bond sales in an attempt to relieve pressure on the market for UK government debt.
The Monetary Policy Committee will announce on Thursday, alongside its latest interest rate decision, whether it is dialling back the pace at which it is cutting its gilt holdings as part of its quantitative tightening programme.
The BoE has been reducing its holdings by £100bn a year, through a combination of active sales and permitting bonds to mature, to £558bn at present. Gilt investors expect the rate to slow to about £72bn a year, according to a recent official survey.
BoE governor Andrew Bailey earlier this month said the decision on QT was “open”, a hint that he is open to trimming the pace. The BoE’s gilt holdings were built up through bond-buying programmes in recent crises.
Sushil Wadhwani, a former BoE policymaker, told the Financial Times that it would make “no sense” to continue selling longer-dated gilts in particular given the turbulence in the financial markets.
Pausing active sales of all gilts “would have a dramatic impact,” he added. “It would surprise people; they should use the fact that these announcement effects are very large.”
Gilt investors have urged the BoE to avoid worsening a rise in UK long-term borrowing costs, which reached their highest since 1998 earlier this month as part of a global sell-off. The 30-year UK gilt yield peaked above 5.7 per cent, but has since come back to below 5.5 per cent.
Investors have argued that extra gilt sales, alongside near-record regular issuance, are helping to push down long-term gilt prices down and yields up. But others say the scale of the BoE’s active sales, compared with regular government issuance of £300bn a year, is too small to meaningfully affect prices.
The BoE’s decision is doubly sensitive as chancellor Rachel Reeves faces a hole in the public finances ahead of her November Budget.
Higher market interest rates feed through to higher debt service payments, which are already above £100bn a year, as the government has to come to market to refinance its debt load at the higher yields.
On the other hand, if the BoE reduces its gilt holdings more gradually, it could lead to extra interest-related costs on the portfolio in future years, hitting the headroom Reeves has against her main fiscal rule.
These losses come because of the gap between the official bank rate the central bank pays on reserves and the lower return it makes on its portfolio of securities. The Treasury is required to indemnify the BoE against the losses it is incurring as it runs down its debt holdings.
The BoE’s survey, published last month, suggested that market participants expected the BoE to curb run-off to £72bn for the year to September 2026. This would imply about £23bn in active sales — £10bn more than the current period — given the smaller amount of bonds maturing. Halting all active sales would mean a balance sheet reduction of £49bn.
The BoE is widely expected to keep its key interest rate unchanged at 4 per cent at the meeting.
April LaRusse, head of investment specialists at asset manager Insight Investment, a big gilts investor, said if the bank suspended active sales entirely it would be a “shock and awe” move. “I don’t see why they wouldn’t,” she said.
Other big central banks, such as the European Central Bank, have pursued passive QT, letting crisis purchases roll off naturally, so a shift by the BoE in this direction would be moving closer to peers.
But if the BoE is seen to be trying to offset a rise in gilt yields when the Treasury is borrowing more, it risks the perception that fiscal policy is driving monetary policy, a form of so-called fiscal dominance.
Jonathan Mondillo, global head of fixed income at asset manager Aberdeen, said curbing active sales “would potentially help to alleviate some of the pressures at the long end, [but] this would not address structural issues facing markets”, such as record sovereign issuance among rich nations.
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