Bank to slow bond-selling programme to £46bn/year
The Bank of England has also voted to slow the pace of its bond selling programme, as well as leaving interest rates on hold.
At this week’s meeting, the Bank’s monetary policy committee has decided to unwind its quantitative tightening programme at an annual average pace of £46bn by the end of 2034.
That will be conducted through annual sales of £20bn, plus £26bn per year of gilts which mature.
That’s down from a previous QT pace of £70bn, and a slightly larger slowdown than expected (the City had expected QT to be slowed to £50bn).
Today’s decision follows criticism that QT has been pushing up government borrowing costs, because the Bank’s sale of gilts increases the yield on government debt. The Bank also makes a loss on the sale, which lands on the taxpayer.
The Bank currently holds £488bn of gilts through its asset purchase programme (created after the financial crisis), which bought debt with newly created money.
It has decided to set aside £120bn of bonds to back the issuance of banknotes, and wind down the remaining £368bn by the end of 2034.
Key events
Chancellor John Healey has revealed how the Bank of England’s bright idea to sell its bond holdings back to the government would work in practice.
In a letter to Andrew Bailey today, Healey says:
As you note in your letter, officials have been developing a model whereby all APF active gilt sales are conducted to the government and not to the market.
HM Treasury would instruct the DMO via the Debt Management Account to purchase the APF gilts that the Bank Executive is selling in its implementation of the MPC’s multi-year plan.
Sales would be conducted at market prices and in a pre-defined manner, pre-announced by the Bank Executive, with the remaining gilts continuing to be held by the APF to maturity. The DMO would subsequently on-sell the gilts to the National Loans Fund for cancellation.
The indemnity arrangements between HM Treasury and the Bank would continue unchanged. HM Treasury would in due course instruct the DMO to issue a corresponding amount of debt to finance such APF purchases through the annual financing remit.
This sales model, whilst leaving the overall supply of gilts to the market from the public sector unchanged, would see a return to a single public sector supplier of gilts to the market. Such an arrangement, along with the MPC’s multi-year path of QT and the confirmation that the longest-dated APF gilts will be held in the APF to indirectly back banknotes, would also support the principle of predictability, whilst continuing to uphold the independence of the MPC
The Bank of England are also warning that UK energy bills are set to rise next year.
It points out that Ofgem’s headline energy price cap for October to December will increase to £1,723, somewhat higher than it expected in July.
The cap was now expected to “rise substantially further in 2027 Q1, all else equal”, it adds.
Berenberg: Bank preparing for November rate hike
The Bank of England has prepared the ground to raise interest rates after its next meeting, on 5 November, predicts Berenberg economist Andrew Wishart.
He has scrutinised the minutes of this week’s meeting (online here) , and spotted that fourof the six policymakers who voted to hold rates today have hinted that they coud support a rate rise in future.
They are:
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Despite emphasising weak economic conditions again, Governor Andrew Bailey said that “it is likely policy may have to tighten” if the war goes on,
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Sarah Breeden said that, if inflation risks crystallise, it will become “increasingly appropriate for Bank Rate to respond”,
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Clare Lombardelli said that, if the conflict continues, “the case for raising Bank Rate is building”,
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And Dave Ramsden added that “were upside pressures on the inflation outlook to continue to build, there could be a case for increasing bank rate”.
Bank ‘worried about midterms and Iran war’
Professor Costas Milas of the University of Liverpool is intrigued by the Bank’s decision to pause active QT (sales of government bonds) for six months.
He tells us:
This suggests to me the BoE is worried about persistent market volatility related to the U.S. mid-term elections plus the geopolitical risk linked to the war in Iran.
It also suggests to me the MPC members are currently thinking that the impact of QT on yields is in fact higher than the 20-30 basis points reported in July’s Monetary Policy Report but are “shy” to state this directly.
My BoE Staff Working Paper (jointly with Michael Ellington, University of Liverpool, and Ryland Thomas, BoE) points to a 40 basis points impact of QT on UK yields, so I am tempted to conclude our estimated impact is more “aligned” with reality than the MPC’s thinking!
If energy prices don’t cool down soon, the Bank of England will “reluctantly hike rates in November and probably in February too”, predicts ING.
They told clients:
The Bank of England has voted 6-3 in favour of keeping rates on hold at 3.75%, but the overriding message is clear: it is prepared to hike interest rates if energy prices stay high. The chances of a November hike hinge entirely on whether oil and natural gas prices come lower.
Rufaro Chiriseri, head of fixed income at RBC Wealth Management, has a pithy take on today’s Bank of England decisions:
“A 6-3 hold masks a split. Three members voted to hike, with several ‘neutral’ voters signalling openness to tightening if energy prices persist or second-round effects emerge. However, the overall dovish sentiment dominated, and markets are paring back Bank Rate expectations in a year’s time from peaks of 4.88% last week to 4.70% today – a level we think is still too high.
The QT pace came in at £46bn annually, which is slightly below the £50bn consensus forecast. More importantly, the Bank will halt long-dated gilt sales by setting aside £120bn for banknote backing. Markets welcomed this new QT approach, and the long-end is outperforming, with 30-year yields down 11bps.”
The Bank of England is also warning that inflation is set to rise through the rest of this year, and in early 2027.
Based on energy prices as at close of business on 14 September, CPI inflation was expected to increase to around 3.75% in 2026 Q4, compared with 3.2% at the time of the July Report, and to reach slightly above 4% in 2027 Q1.
Economics commentator Chris Giles argues that today’s decision to unwind quantatitive easing completely is “NOT something to get worked up by, however tempting”.
He’s made some interesting points about today’s decision to slow the pace of quantitative tightening, and the suggestion that bonds could be sold back to the government, on a BlueSky thread – here are some of them:
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It is marginally bad for the current budget rule and marginally good for the debt rule. Marginally is the operative word here.
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Having DMO do sales to the market is also marginal. It always set the marturity structure of issuance after knowing the BoE sales, so was always in charge. This formallises the practice
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There is a tiny benefit to the public purse from BoE not selling small quantities of illiquid bonds
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UK gilt market likes it – but let’s not get too excited by a 10bp move in the 30-year yield. That way madness lies
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The pause in sales until April suggests that despite working on this for a year and despite many outsiders suggesting similar stuff, UK authorities can’t take decisions quickly
The Bank has also decided to pause its bond sales for six months.
Reuters has the details:
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.
Gilts rally, pushing down government borrowing costs
Government borrowing costs are falling, after the Bank of England announced a slowdown in the pace of its bond sales programme.
The yield, or interest rate, on short and long-dated bonds have both dropped today.
10-year bond yields are down 6 basis points (0.06 of a percentage point), at 5.23%, away from the 19-year highs seen earlier this week.
30-year bond yields are down 7bps at 5.79% – having hit their highest level since 1997 a few days ago.
Investors may be relieved that the Bank is keen to sell some of its bond holdings back to the government (see last post), rather than trying to flog ‘em back to investors in the bond market.
If ministers agree to this proposal, it would remove some of the pressure that has pushed up bond yields and also cut the losses being incurred by taxpayers….
BoE has ‘robust discussion’ about selling bonds back to the government
Excitingly, the Bank of England is considering selling some of the UK government bonds it owns back to the UK government!
The Bank says it believes some of its bond holdings will “likely become less aligned with market demand” as it unwinds its asset purchases under the plan laid out at noon (see earlier post).
It is considering a solution of selling gilts back to the Treasury, rather than to bond investors – and reveals there has been a “robust discussion” about this issue.
As flagged earlier, the Bank is planning to sell £146bn of gilts as part of its QT programme. The remaining £222bn will be run down “passively” (ie, the Bank will wait until they mature).
No final decision has been made yet. The Bank says:
With regard to this issue, the Committee considered important institutional questions regarding the potential interaction between monetary and fiscal actions and the independence of MPC decision-making over monetary policy.
This led to a robust discussion around the balance of costs and benefits within the wider package of measures announced in relation to the Bank’s implementation of QT.
Why six policymakers voted to hold rates
As we saw back in July, there’s a majority of six Bank of England policymakers who are reluctant to raise interest rates.
The Bank says:
Six members (Andrew Bailey, Sarah Breeden, Swati Dhingra, Clare Lombardelli, Dave Ramsden and Alan Taylor) preferred to maintain Bank Rate at 3.75% at this meeting.
These members were concerned about recent developments in a range of energy prices and their impact on holding CPI inflation above target for longer than had been previously expected. Domestic activity and tight financial conditions were restraining inflationary pressures, but the risk of second-round effects was growing in the absence of a lasting resolution of the conflict.
Two members in this group (Swati Dhingra and Alan Taylor) acknowledged these risks, but placed particular weight on the role of slack in moderating inflation, evidence of restrained pass-through of costs to prices, and the restrictive level of Bank Rate, all of which would allow more time to observe further evidence.