MNI view on the QE technical parameters

Regarding the note in yesterday's BOE Minutes that QE technical parameters had scope to be re-evaluated, we think there is a good argument for the Bank to:

1. Modify the 70% free float limit, perhaps with a monetary exception. For example, the Bank will not purchase above 70% but can purchase above 70% as long as the free float still exceeds GBP8bln (a number high enough to maintain the gilts liquidity in the secondary market).
2. Change the lower-end of the maturity bucket. This fiscal year, the DMO has been actively issuing 3-year gilts. This is something of a break from the DMO's previous strategy of 5-year gilts being the shortest gilts that it would regularly issue. However, the 0.125% Jan-23 gilt has not been eligible for purchase since the DMO launched it as its maturity was under 3-years at launch and the recently launched 0.125% Jan-24 gilt will become ineligible for purchase under the current rules at the end of January despite the DMO likely to continue to build up the benchmark. We think there is a strong argument to lower the minimum maturity of gilts eligible for APF purchases to 2-years or possibly even a little shorter (21-months for example). Other than increasing the gilts eligible for the Bank to purchase, we note that a decent proportion of UK mortgages are fixed at the 2-year area, so purchases here could potentially (marginally) help the transmission mechanism.