MNI POLICY: BOE Seeks Low Key QT, No Sharp Pace Change Likely

MNI (LONDON) - The Bank of England is likely to make low-key policy announcements next Thursday, announcing that it will slightly accelerate or hold roughly steady the pace of its reductions in bond holding over the next 12 months, and leaving its policy rate on hold.

With a surge in maturing gilts over the next 12 months to GBP87 billion, easing the overall pace of the bond runoff even modestly from the current GBP100 billion, to say GBP80 billion, would see a hard stop to sales, meaning the BOE would no longer be able to smooth active sales along the curve. Just keeping the annual pace steady would slow active sales to just GBP13 billion, but the odds appear tilted to a modest increase - with some analysts making a plausible case for up to GBP120 billion in total reductions.

The BOE has tried to keep quantitative tightening in the background, while continuing to meet demand for reserves, since the initial Monetary Policy Committee vote in September 2023 to reduce Asset Purchase Facility gilt stocks by GBP100 billion over the year ahead.

While the BOE could slow the pace of gilt sales if there were clear signs of market distortions linked to reserve shortages, Deputy Governor Dave Ramsden has sought to minimise recent anomalies in market behaviour, including a sharp rise in usage of the short-term repo facility. The BOE’s new executive director markets, Vicky Saporta, used her first speech in the job to highlight progress in transitioning to a system of demand-driven reserves.

FREEING UP SPACE

BOE Governor Andrew Bailey has been an advocate for reducing asset holdings without delay, publicly noting that this would free up space for fresh purchases should they be needed in a future crisis. Officials should also see benefits in having the Bank out of the political firing line after the poor optics of Treasury compensation paid for losses on the QT/QE programme. (See MNI INTERVIEW: BOE To Run QE Gilts Down To Zero - Saunders)

A widely-anticipated move in the government’s October Budget to include the BOE’s balance sheet in its definition of public sector net debt should ease potential political pressure, as it would mean that some of the losses incurred during QT would be shifted back in accounting terms towards the time when the gilts were purchased. (See MNI INTERVIEW: UK Likely To Restore BOE To Debt Calculation)

At its meeting, the MPC also looks likely to hold Bank Rate at 5.0%, after having cut by 25 basis points in August in what it described as a “finely balanced” decision. Steering away from the idea that it might be about to engage in a string of consecutive cuts, the Bank’s policy focus will shift to the November quarterly forecast round.

At least one member, Swati Dhingra, is expected to back further easing, though analysts are unsure whether Deputy Governor Dave Ramsden will again move ahead of colleagues on policy and join her. (See MNI POLICY: BOE's New Dove Ramsden Often Leading Indicator)