The Bank of England (BoE) is facing increasing calls to slow down or completely halt the sale of its long-dated government bonds, which currently total approximately $219 billion (£163 billion), according to a Bloomberg report. This pressure comes as recent market turbulence has exposed vulnerabilities in the demand for such debt, prompting forecasters like Oxford Economics and HSBC to suggest the central bank either limits future sales or stops them altogether. This shift would represent a significant change in how the BoE is reducing its balance sheet, a process known as quantitative tightening (QT).
Former Monetary Policy Committee member Michael Saunders, now a senior advisor at Oxford Economics, anticipates the BoE might soon announce an end to most long-dated gilt sales. He expects the annual pace of bond holding reductions to decrease from $134 billion (£100 billion) to between $99 billion and $107 billion (£75-80 billion). Saunders noted that announcing this change this year could help reduce uncertainty around the future of QT and active sales, potentially easing strains in the gilt market. While an early end to sales might crystallize a loss of $36 billion (£27 billion), the annual financing cost of $1.6 billion would be less than the $3.3 billion in interest the BoE expects to receive.
The BoE's QT program differs from other major central banks by actively selling bonds in addition to letting existing holdings mature. A Reuters analysis highlighted that while the BoE has sold $17 billion (£13 billion) of gilts and allowed $116 billion (£87 billion) to mature over the past year, maintaining the $134 billion pace for the next 12 months would necessitate a record $68 billion (£51 billion) in sales due to fewer redemptions. This could be problematic as market conditions have changed, and previous sales of similar magnitudes were in different environments. Some analysts, like Dani Stoilova of BNP Paribas, even suggest the BoE could cease gilt sales entirely from October to avoid market impact, especially given concerns about liquidity and the interaction of QT with monetary policy and market functioning.
The BoE's long-term plans for its gilt holdings remain largely undisclosed. However, there's growing scrutiny and political pressure over the substantial losses incurred from selling bonds. Governor Andrew Bailey stated that QT was not to blame for higher government borrowing costs, yet the central bank is now acknowledging that its operations are not occurring in a vacuum. The objective is to lower bank reserve holdings from excessive levels, currently around $912 billion (£680 billion), well above the estimated preferred range of $516 billion to $723 billion (£385-540 billion).
