The Bank of England (BoE) has updated its assessment of the impact of its quantitative tightening (QT) program on 10-year British government bond (gilt) yields. The central bank now estimates that QT has contributed 15-25 basis points to the cost of 10-year government borrowing, an increase from the 10-20 basis points estimated a year ago. This revision reflects the additional QT undertaken over the past year. Since the start of QT in February 2022, 10-year gilt yields have risen by approximately 3.25 percentage points, with a 0.55 percentage point increase in the past year alone.
Market participants are anticipating a slowdown in the pace of QT. Investors expect the BoE to reduce its bond portfolio by £50 billion in the 12 months to September 2027, a decrease from the current £70 billion annual pace. A survey by the BoE indicated that market participants anticipate a split of sales for the next period, with 43.3% in 3-7 year maturity gilts, 41.1% in 7-20 year maturity gilts, and 15.6% in longer maturity bonds. The overall stock of debt is projected to fall to £488 billion by September.
Despite the revised impact, BoE Deputy Governor Dave Ramsden stated that the overall effect of QT remains "very small," and the Bank Rate continues to be the primary tool for monetary policy. However, the BoE is "very cognisant of developments in gilt markets, particularly at the long end." Citi analysts suggest that prudence may lead the BoE to slow the annual pace of QT to £75 billion, potentially by adjusting the longer maturity buckets or ending long sales completely, due to reduced demand from pension funds and potential liquidity issues at the long end of the market.
