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MNI INTERVIEW: Risk BOE Gilt Sales Spark Volatility - Aikman

(MNI) London

Former BOE Technical Division head David Aikman says the BOE should sell its gilts even if it pushes yields higher.

The Bank of England should get on with shrinking its balance sheet, even if quantitative tightening is more likely to prompt market volatility than some at the BOE had hoped, the Bank’s former technical head of division, David Aikman, told MNI.

With the BOE set to launch its framework for active gilt sales in August, some officials have argued that the effect on liquidity and bond yields from active gilt sales should be minimal, given that the main effect of quantitative easing had been to restore liquidity to markets via a flow of purchases. But a rival view, expressed by Stanford Professor Hanno Lustig at a conference hosted by Aikman last week, is that a decade of unconventional monetary policy may have suppressed interest rates at artificially low levels, and yields may snap back once stocks of bonds begin to fall.

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The Bank of England should get on with shrinking its balance sheet, even if quantitative tightening is more likely to prompt market volatility than some at the BOE had hoped, the Bank’s former technical head of division, David Aikman, told MNI.

With the BOE set to launch its framework for active gilt sales in August, some officials have argued that the effect on liquidity and bond yields from active gilt sales should be minimal, given that the main effect of quantitative easing had been to restore liquidity to markets via a flow of purchases. But a rival view, expressed by Stanford Professor Hanno Lustig at a conference hosted by Aikman last week, is that a decade of unconventional monetary policy may have suppressed interest rates at artificially low levels, and yields may snap back once stocks of bonds begin to fall.

Keep reading...Show less