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MNI POLICY: BOE To Speed Up QT, Detail Likely In Sept

(MNI) London

The Bank of England is set to decide on an accelerated gilt sales programme which could marginally push up costs for the public finances, with the detail probably coming in September.

While details of the first year of sales were unveiled last August for the Monetary Policy Committee to vote on it in September for an October commencement, markets and the Bank are now familiar with the process, so both the detailed announcement and the vote are likely to come next month rather than at this week’s meeting.

This time round the target will likely be higher than last year’s GBP80 billion stock reduction target, half of which was to be achieved through active sales, but the effect of that acceleration on the public finances, which the Office for Budget Responsibility will estimate for Budget arithmetic, looks set to be marginal. Deputy Governor Dave Ramsden, responsible for the Bank's balance sheet, said in a July 19 speech that he favored faster gilt sales for the second year of the programme.

The Bank's Asset Purchase Facility, its quantitative easing/tightening vehicle, is currently making a loss on its gilt holdings, with the interest it receives on bonds less than Bank Rate, which it pays on reserves. Additional losses come when it sells the gilts for less than it paid.


At current prices, lifetime losses could be smaller if the Bank divests its holding more quickly, but capital losses would increase the hit to the public finances over the OBR's five-year forecast period. On the other hand, while the downward slope of the yield curve indicates that gilt prices are set to improve if it waits longer, the Debt Management Office would in the meantime have to issue more bonds to cover APF losses, adding to the debt interest burden.

So far this fiscal year, the APF has lost GBP11 billion through gilt sales and is on track to lose GBP12.9 billion over the year. Accelerating sales to GBP50 billion next year would, if conditions stayed the same, result in around an extra GBP1.5 billion of losses, ignoring any offsetting effects elsewhere, a relatively modest hit.

While an announcement last Thursday that the European Central Bank had axed remuneration on minimum reserves has rekindled debate over whether the BOE could do something similar, thereby slashing the APF's net interest bill, Governor Andrew Bailey has firmly rejected any such suggestion in the past. One view at the Bank, set out by former Deputy Governor Charles Bean among others, is that cutting reserve remuneration would be equivalent to a tax on banks, and that the Treasury should just go ahead and do this directly if it feels it is warranted rather than taking a measure which would raise questions over fiscal dominance and distort the BOE's chosen monetary framework.( See MNI POLICY: BOE Steering Clear Of Reserve Remuneration Change)

MNI London Bureau | +44 203-586-2223 |
MNI London Bureau | +44 203-586-2223 |

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