The Bank of England will step up the pace it’s unwinding its quantitative easing portfolio of bonds, reversing a vast stimulus program it deployed through the financial crisis and pandemic.
(Bloomberg) — The Bank of England will step up the pace it’s unwinding its quantitative easing portfolio of bonds, reversing a vast stimulus program it deployed through the financial crisis and pandemic.
The Monetary Policy Committee said its balance sheet of government debt will shrink by £100 billion in the second year of so-called quantitative tightening through bonds maturing or being sold. That’s a faster pace than the £80 billion reduction in gilts in the first year scaling back the portfolio.
The move signals that officials led by Governor Andrew Bailey are determined to normalize policy settings after the emergency program was put in place in 2009. It presents a challenge for the UK Treasury, which is selling more bonds to finance its debt and has the added burden of having to pay for losses the BOE incurs through the program.
“A faster pace of QT will add to the pressures faced by the public finances, since the Treasury is committed to indemnifying the Bank of England on any losses made on gilts at the point of sale, at a time when gilt issuance is already high,” said Martin Beck, chief economic advisor to EY ITEM Club
The UK central bank is moving more quickly than the US Federal Reserve and European Central Bank to scale back its balance sheet, according to analysis by Columbia Threadneedle.
The BOE said that the pace is “unlikely to disrupt the functioning of financial markets” and that a £100 billion target would mean the speed of gilt sales is left “broadly unchanged” due to the number of bonds maturing in the portfolio.
“The MPC also reaffirmed that there would be a high bar for amending the planned reduction in the stock of purchased gilts outside a scheduled annual review,” minutes from the BOE’s monetary policy meeting said.
Under QE, the BOE snapped up £895 billion of government and corporate bonds to boost the economy, helping to lower long-term interest rates and stabilize markets during times of crisis. It currently has just under £760 billion of gilts remaining on its balance sheet after almost completely unwinding its corporate bond purchases.
The BOE decided to speed up the run-off of its balance sheet after judging last month that the unwinding of QE was “going smoothly” and having only a small impact on gilt yields. It said that it needed to slash its stock of bonds to give it more headroom in case it needs to use the controversial tool again in a future crisis.
However, critics have warned that QT is having a much bigger impact on gilt yields than the BOE estimates. Columbia Threadneedle has likened the unwinding to former Chancellor of the Exchequer Gordon Brown’s infamous decision to “sell gold at the bottom of the market.”
–With assistance from Andrew Atkinson and Irina Anghel.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.