MNI INSIGHT: BOE Gilt Sales Not Assured When Rates Hit 1%

While the Bank of England will consider triggering active gilt sales if, as widely expected, it hikes Bank Rate to 1% in May, policymakers have stressed that such a move is not a foregone conclusion, particularly at a time when yields are rising.

Some observers, like former senior BOE economist Stephen Millard, now deputy director at the National Institute, argue that, barring market stress, there will be little reason to delay gilt sales once Bank Rate hits the threshold at which current BOE guidance says that such a move will be considered. The Bank must return its GBP1 trillion balance sheet to desired levels, Millard told MNI in an interview. (See MNI INTERVIEW: Strong Case For BOE Gilt Sales At 1%-NIESR)

But the debate over when to start sales is nuanced, and policymakers have noted in public that 1% is only a point at which they will consider sales rather than suggesting they will crack on without delay.

The marked rise in yields in response to the inflation shock and the Bank’s data showing lenders expected to reduce secured credit in the second quarter may be a significant factor giving pause for thought. Asked on Thursday about the case for sales, Monetary Policy Committee member Catherine Mann noted that “financial conditions have been changing.”

LEAVING SPACE FOR BANK RATE

MPC members may also be keen to ensure that gilt sales do not tighten conditions to such an extent that they interfere with the use of Bank Rate, which, as they reaffirmed in February, is the BOE’s preferred active policy tool in most circumstances. The Bank might want to be able to hike sufficiently in this cycle to have enough conventional policy space to offset a future downturn through Bank Rate cuts rather than by having to resort to quantitative easing.

As repeatedly cited by former Governor Mark Carney, the average change in UK policy rates in easing and tightening cycles has been 150 basis points, with the average cut larger still, at 250-bps in the late 90s and early 2000s easing cycles.

The Bank also remains unsure as to how much tightening effect gilt sales will have.

MPC member Silvana Tenreyro, like former member Gertjan Vlieghe, argues that neither quantitative easing nor tightening have much effect on yields in liquid markets, so long as it is not perceived to be sending a signal about future policy rate setting.

But if QT does reduce space for rate rises, it may complicate the BOE’s task at a time when, as noted by Governor Andrew Bailey on Thursday, combatting elevated inflation without triggering a recession will be a delicate balancing act.