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Berenberg: Expect March gilt to be reinvested with QT beginning in May

BOE
  • Look for 25bp hikes in Feb22, Q4-22, Q2-23 and Q4-23 to leave Bank Rate at 1.25% by end 2023.
  • “Expect the BoE to announce the start of a passive reduction of its balance sheet starting in May 2022.”
  • “Allowing such a large chunk [the March gilt] to mature right at the start of QT risks sending an excessive signal about the future pace at which the BoE’s gilt holdings will fall and could provoke an unnecessary overreaction in the market. In our view, the BoE should consider delaying the start of a passive unwind until the May MPC meeting or announce that some smoothing will occur during QT to avoid sudden drawdowns – which could involve setting a monthly limit on the value of bonds that will be allowed to roll off.”
  • “The question of when and how to undertake QT is not purely an economic one. An orderly normalisation of the BoE's gilt holdings will also be determined by operational issues, such as the need to supply adequate sterling reserves to the banking system and the capacity of financial participants to absorb BoE gilts sales.”
  • In terms of active QT, Berenberg notes that “considering the uncertainties of QT, active sales in 2022 would be premature. We believe the BoE will wait until 2023.”
  • “Under a solely passive unwind, APF holdings will roughly halve over the next decade in nominal terms and decline from 38.1% to 11.2% of GDP... In a scenario in which the BoE begins to add active sales at £2bn per month starting January 2023, gilt holdings would fall by c75% by 2031 - if that increases to £4bn per month, gilt holdings would fall to zero over the period”
  • “The most aggressive QT scenario we outline (passive plus £4bn per month in actives sales)… would only occur in an ultrastrong growth and inflation scenario.”
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