Bank of England is preparing to sell QE bonds

5 Aug 2022 , 08:00 AM

With a 40-billion-pound ($49 billion) sales programme due to begin next month, the Bank of England is poised to make history as the first major central bank to sell some of the government bonds it acquired over more than a decade of quantitative easing.

The Monetary Policy Committee of the Bank of England stated on Thursday that it was “provisionally minded” to begin sales in the second half of September, pending market and economic conditions as well as an affirmative vote at its upcoming meeting on September 15.

At a press conference, Deputy Governor Dave Ramsden stated that once the programme had started, there would be a “high bar” to changing gilt sales owing to market conditions.

The BoE wants to make sure it has the flexibility to resume QE, if necessary, but does not anticipate the gilt sales to have a large impact on tightening monetary conditions in comparison to hiking interest rates or the initial gilt purchases.

The sales should not significantly affect gilt yields, according to HSBC economists, “if effectively communicated,” but there is a risk of volatility because there aren’t enough short-dated gilts available in the British repo market.

In its announcement on Thursday, the BoE stated that in order to keep market rates near to its Bank Rate, it will establish a new weekly 7-day short-term repo facility.

During the COVID-19 epidemic, the BoE increased the scale of its QE programme by double. However, in February, it stopped reinvesting the revenues of maturing gilts, which caused its portfolio to fall from 875 billion to 844 billion pounds.

However, if it wants to lower its assets more quickly, it must engage in active sales due to the long average maturity of its holdings when compared to those of other significant central banks, such the U.S. Federal Reserve.

By virtue of gilts maturing and quarterly sales of 10 billion pounds, the BoE stated on Thursday that it anticipated reducing its holdings by 80 billion pounds in the year beginning in September.

Sales will be timed to prevent conflicts with gilt auctions held by the UK Debt Management Office.

The sales will be broadly identical to the acquisitions made by the BoE, which were done by purchasing buckets of gilts with maturities ranging from 3 to 7 years, 7 to 20 years, and longer. (0.8241 pounds for $1).