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MNI View: The MPC should wait for November to start active gilt sales

BOE
  • Waiting for the November meeting to reconsider the appropriate size of the active gilt sales programme might be more prudent for the MPC, than starting sales this week, as we will have more information on the fiscal side, the new remit and how the gilt market reacts to the increase in supply from the DMO.
  • However, despite making it very clear that the MPC has not made a decision over whether to start active gilt sales, the market is very much expecting the programme to be started and carried out as previously anticipated. So there may be another hit to the Bank’s communication strategy if sales are not carried out.
  • There are also political considerations – as the Bank of England has been under intensifying pressure from MPs to reduce the size of its balance sheet. Furthermore, the Bank would be leaving itself open to accusations of monetary financing if it was seen to be reducing active gilt issuance purely because of an increased government deficit.
  • We think that through clear communication these accusations can be avoided – pointing to a reduction in the gilts that the BOE could buy without distorting the market via the MaPS survey would be one way to do this. Indeed, the increase in gilt issuance over the next 12 months could be anywhere between GBP30-130bln – some of this was likely expected when the August survey was conducted, but some of the rest will reduce the ability of the BOE to do active gilt sales.
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  • Waiting for the November meeting to reconsider the appropriate size of the active gilt sales programme might be more prudent for the MPC, than starting sales this week, as we will have more information on the fiscal side, the new remit and how the gilt market reacts to the increase in supply from the DMO.
  • However, despite making it very clear that the MPC has not made a decision over whether to start active gilt sales, the market is very much expecting the programme to be started and carried out as previously anticipated. So there may be another hit to the Bank’s communication strategy if sales are not carried out.
  • There are also political considerations – as the Bank of England has been under intensifying pressure from MPs to reduce the size of its balance sheet. Furthermore, the Bank would be leaving itself open to accusations of monetary financing if it was seen to be reducing active gilt issuance purely because of an increased government deficit.
  • We think that through clear communication these accusations can be avoided – pointing to a reduction in the gilts that the BOE could buy without distorting the market via the MaPS survey would be one way to do this. Indeed, the increase in gilt issuance over the next 12 months could be anywhere between GBP30-130bln – some of this was likely expected when the August survey was conducted, but some of the rest will reduce the ability of the BOE to do active gilt sales.