Andrew Bailey, Governor of the Bank of England. The MPC could agree to increase the pace of bond sales at its meeting on Thursday
Almost a year after Liz Truss' mini-budget triggered a bond market crash, the Bank of England is preparing to test investors again.
This Thursday meeting of the Monetary Policy Committee (MPC), where rate setters will discuss whether interest rates should be raised to 5.5%. Inflation data released yesterday is expected to show an acceleration in price growth in August and will contribute to the debate.
However, the meeting could also see the MPC agree to increase the pace of bond sales as it speeds up efforts. trim its huge balance sheet.
In July, Sir Dave Ramsden, deputy governor, said he saw potential to «increase the pace of the gold share drawdown slightly.»
The bank is seeking to sell bonds worth more than 700 billions of pounds, which he snapped up in the aftermath of the 2008 financial crisis and the pandemic to help prop up the economy.
The Bank currently sells £10 billion worth of bonds per quarter, while a further £10 billion is maturing and leaving its balance sheet, reducing the size of its balance sheet by £80 billion a year.
Meanwhile However, analysts believe the Bank could decide to increase sales to £15bn per quarter in a process known as quantitative tightening (QT).
The pace of repayments should also rise to around £15bn.
If sales pick up, Bank officials will hope they don't see a repeat of the volatility seen this time last year.
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The post-mini-budget crash forced it to suspend QT and actually start buying bonds.
1,509 Bank of England holdings
Conditions are much calmer this time around, but the process is not without risk. It also represents a headache for the Chancellor as the Treasury will be billed for any losses the Bank incurs from the sale of government securities.
The Bank of England has been planning how to sell bonds in financial markets since they first bought them when Mervyn King launched his quantitative easing (QE) program in 2009.
At the height of the financial crisis Unable to lower interest rates any further, the Bank began creating money to buy bonds in an attempt to keep money in the financial system.
This became a favored policy. during the upheaval of the ensuing decade—and one official seemed unable to turn things around.
By its peak in 2022, the mountain of purchased assets had grown to £875 billion of government bonds and £20 billion of corporate debt. This was much more than anyone could have imagined in 2009.
A year ago, the Bank began selling debt back to the financial markets.
Almost immediately, bond markets descended into chaos. Quantitative tightening (QT) was almost derailed the moment it began. However, after order was restored to the bond market, the sales continued.
A year after the carnage began, the policy was all but forgotten. Instead, the focus has been on rising interest rates.
«It's gone very well,» says Catherine Naess, PGIM's chief European fixed income economist and formerly of the Bank of England.
Selling £80bn of government bonds over the course of a year may seem like a lot of money, but compared with the pace of bond buying under QE it is relatively slow, says Melanie Baker of Royal London Asset Management.
“It’s not Simply quantitative easing is to ensure regression. «It was originally intended to have a 'shock and awe' effect — they want to achieve the exact opposite of QT running in the background,» she says.
Paul Fisher, who worked at MPC at the launch of QE, says the lack of public attention is a testament to QT's success: «You notice these things when they go wrong.»
The Bank is expected to step up its program QT this week, at the same time Bailey and his MPC colleagues are set to lift interest rates from 5.25% to 5.5%.
1509 Bank of England interest rate forecast
Politicians meet the next day after the Office for National Statistics releases inflation figures for August. Economists expect growth to 7% or more, accelerating from 6.8% in July amid rising gasoline prices.
This is forecast to be a short-lived blip in the downward inflation trend, but will still highlight the ongoing threat of rising prices, which is pushing the MPC to raise rates again.
However, there are complaints that the Bank's policy package is bad news for the Treasury.
Rising rates cause interest rates on government debt to rise, and government bonds are sold into the market at a loss to government exchequers.
The bank bought most of the bonds when interest rates were very low and bond prices were high.
As interest rates were raised, the price of bonds fell because higher yields were available elsewhere. This means that the Bank loses money if it sells securities at a price lower than what it bought the assets at.
When quantitative easing began, the Treasury agreed to cover any losses from the scheme.
< p >Funds are transferred every three months as needed. In July alone, the Treasury transferred £14.3bn to the Bank under repayment terms, ONS figures show.
Sir John Redwood, a Conservative grandee, says: “The Bank should no longer sell bonds on the market, creating huge a loss to the Treasury and taxpayers.”
The scheme generated significant profits for the Treasury. in earlier years, but this presentation is more painful.
Christopher Mahon of Columbia Threadneedle Investments warned: “The losses from the quantitative easing experiment are enormous. Even the Bank's own figures project staggering losses. Figures published by the Bank in August show that QE is likely to cost the government £110 billion over its lifetime, around 5 percent of GDP.»
Bond yield 1,509
The MPC does not have to worry about Treasury costs when setting policy, and was not affected by positive cash flows to the Treasury earlier in the scheme.
However, Yael Selfin, chief economist at KPMG, says the Bank could easily suspend QT. to lessen the hit to government coffers.
«There seems to be no obvious urgency to speed up QT to create extra space in case QE is needed,» she says.
“And with interest rates expected to start falling again over the medium term, selling more bonds at lower rates will reduce the losses the Treasury will have to bear.”
The government remains on the sidelines. We're on track to borrow around £130 billion this financial year, so the extra £80 billion — or more — from government bonds coming into the market from the Bank of England is not insignificant.
Bond yields have already risen. higher than in the US and close to the levels seen during the mini-budget collapse, although they are not that abnormal in a world where borrowing costs are rising across the board. However, a further increase in QT could lead to an even higher rise in bond yields.
Andrew Sentance, who was a member of the MPC in 2009, believes that the market is capable of absorbing QT.
> “There is a large demand for quality government debt as a financial asset that the private sector can hold,” he says.
A year has passed since the bond market crash that followed the mini-budget. Bailey and his colleagues will hope so.
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