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The fast expansion of the BOE's balance sheet means gilt sales could be the best way of unwinding QE, NIESR's Jagjit Chadha tells MNI.
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The surge in the Bank of England bond buying following the Covid shock has strengthened the argument for selling gilts back to the market rather than for simply waiting for them to expire at maturity without replacement when the time comes to tighten policy, National Institute of Economic and Social Research head Jagjit Chadha told MNI.
While the spread of gilt holdings across the curve with few big maturities would mean a fairly smooth natural runoff, Chadha said the calculus has shifted as the BOE's asset purchase target soared from GBP435 billion in March 2020 to GBP895 billion now.
"We could think about a particular programme to sell that debt back and call it the Covid sell-off or rebrand it as a particular set of bonds … That might be a feasible way of doing it," he said. "I would have been in the gradual run-off camp I think before the Covid crisis but this very rapid run-off might give us an opportunity to develop a programme of sales on the back of the recovery."
Another approach might be a mix of natural run-off and active sales, as suggested by Monetary Policy Committee member Michael Saunders. But this would leave big questions hanging over the likely pace of gilt supply, and NIESR Visitor Philip Turner suggested that the Bank could take a step back once unwind begins and let the Treasury and Debt Management Office handle the process, providing markets with reassurance that it will not be done in a destabilising way.
TIGHTENING STRATEGY REVIEW
The question of how best to unwind QE is tightly bound up with the questions under consideration in the BOE's review of its tightening strategy, which will determine whether to change the current approach of only commencing a reduction in the stock of assets once Bank Rate has risen to 1.5%.
"In the exit it is not clear that the governor of the central bank will want to reduce its stock of government bonds as a means of tightening policy, because it can do that through the interest rate. What it will not want to do is it will not want to disrupt the bond market," said Turner, a former senior manager at the Bank for International Settlements, in a joint interview with Chadha.
"There is a case for thinking whether somehow the Treasury should take over the exit phase. I think that will not be very difficult to organise, at least at the beginning."
The BOE could swap its bonds with the Treasury, which would give it T-bills, or short-dated bonds, in return leaving the Treasury running the exit, he said.
"If you are going to have two entities of government trying to sell bonds at the same time, the government to raise finance, with the Bank of England selling them because they have a stock of it, this is going to cause great confusion. "So one way or another there is going to have to be one official seller," Turner said.