The Bank of England set out a multi-year programme on Thursday to offload most of its remaining £488 billion (HK$5.12 trillion) pounds of government bonds, but will pause sales for the next six months and halt sales of long-dated gilts entirely.
The BoE's decision comes days after British 30-year borrowing costs hit their highest since 1998 as part of a global bond selloff which reignited criticism that the BoE's bond sale policy crystallises losses for the central bank that are underwritten by the government.
Governor Andrew Bailey has long stressed his desire to reduce interest-rate risk on the BoE's balance sheet — which is increased by holding long-dated gilts — and the central bank argues that changing the pace of gilt sales mostly affects the timing of losses to the government rather than the total size.
"Today we provided clarity over the future of our quantitative tightening policy", Bailey said in a statement.
"The Monetary Policy Committee and Bank have decided to withhold a substantial part of the stock of gilts held for monetary policy purposed while the remainder will be unwound over the next eight years," he added.
The BoE bought £895 billion of sterling debt — almost all government bonds — between 2009 and 2021 through successive programmes of quantitative easing aimed at boosting the economy and keeping down longer-term interest rates.
In February 2022 it stopped reinvesting the proceeds of bonds that matured and in September 2022 it started selling gilts to increase the total pace of so-called quantitative tightening to £100 billion a year.
Last September the BoE's Monetary Policy Committee voted to slow the pace to £70 billion and on Thursday the MPC voted 9-0 in favour of the new plan.
Under the new plan the BoE will reduce to zero the gilts it holds for monetary policy purposes. Of the £488 billion of gilts remaining, £120 billion of gilts maturing in 2049 or later will be kept on the BoE's books permanently to back its banknotes.
£222 billion of gilts due to mature by 2034 will be allowed to mature, while the remaining £146 billion will be sold.
That equates to £20 billion a year of sales and an average annual unwind £46 billion including maturing - slower than the £70 billion over the past 12 months but broadly in line with what investors polled by the BoE in July had forecast for 2026/27.
The BoE will also pause all sales until April while it consults with the government on selling gilts direct to the finance ministry's Debt Management Office at market prices, rather than holding its own auctions.
This shift would potentially help avoid getting bad prices at auctions for small residual amounts of gilt.
The BoE's has been unique among major central banks in conducting outright sales of government debt, rather than waiting for it to mature – a reflection of the longer average maturity of British government debt than that of other countries.
The BoE reckons QT has pushed up gilt yields by around a quarter of a percentage point – something it views as small in the context of the surge in bond yields in recent years.
But some analysts reckon the impact is nearer three quarters of a percentage point for 30-year gilt yields – more than the current difference between British and US 30-year government borrowing costs.
Reuters
