Bank of England likely to slow down QT programme, Investec economist says
The Bank of England’s Monetary Policy Committee (MPC) is likely to slow down its quantitative tightening (QT) programme over the next year, an Investec economist has said, as Britain’s central bank looks to quell concerns over rising gilt yields.
“We doubt that the MPC will maintain the same pace of balance sheet reduction next year as in the past year,” said Philip Shaw, the chief economist at Investec, adding that “the longer end of the gilt market has come under a degree of pressure.”
The Bank’s quantitative tightening programme, in which it unwinds earlier quantitative easing (QE) programmes through the sale of government debt, has been conducted at a rate of £100bn per year over the past two years.
As much as £87bn of QT over the past twelve months has related to gilts hitting maturity, while the remaining £13bn comes from active gilt sales from the Bank.
Over the next year, only £49bn of gilts will mature, giving governor Andrew Bailey greater wiggle room to slow down the rate of QT by adjusting the active sales timetable.
One solution could be to maintain last year’s active gilt sales rate of £13bn to bring total QT down to £62bn, Shaw suggests, but Bailey could opt to ease active sales at a slower pace.
“The committee may also make the point that it reserves the right to alter the timetable if it judges this to be necessary,” said Shaw.
“We suspect it will stress this to be meant as a technical decision rather than a signal to the desired monetary policy stance.”
Rising borrowing costs
Gilt yields rose to as high as 5.7 per cent in September compared to just 4.3 per cent a year earlier, making UK government borrowing among the most expensive of any major economy in a warning sign to Chancellor Rachel Reeves as she prepares to lay out Labour’s spending plans at the Budget later this year.
The speed at which the Bank of England sells off gilts is also thought to have a material bearing on government borrowing rates – the faster gilts are sold, the harder it is to find a buyer, so the higher yields have to go to make the debt attractive to prospective buyers.
Reeves will be hoping that a slowdown in the Bank’s QT programme will bring down the cost of servicing government debt, providing her with more flexibility on spending ahead of the Budget.
The MPC’s next decision on interest rates is due at midday on Thursday, at which the Bank is also expected to shed further light on the pace of its QT programme.