Cut in bond sales eases pressure on government

The Bank of England will reduce the amount of bonds it sells back to investors as part of its quantitative tightening programme, easing pressure on the government before next month’s budget.
The central bank’s monetary policy committee said it would carry out £100 billion of quantitative tightening (QT) over the next 12 months, shrinking its balance sheet at the same pace as last year, but drastically reducing active gilt sales to £13 billion. This is down from active bond sales of £50 billion over the previous year, with the remaining £87 billion coming through maturing gilts where proceeds will not be reinvested.
The £100 billion figure was expected by financial markets but is lower than the £125 billion estimate made by some economists, which would have ramped up financial losses for the Bank and Treasury.
The Bank became the first big monetary authority to begin active bond sales in 2022, as it looked to drastically shrink the size of its balance sheet after emergency quantitative easing carried out during the financial crisis, the Brexit vote and the pandemic. The QT decision has an outsized impact on the government’s public finances, as bond-selling crystallises losses for the Bank as gilts have fallen in price after recent interest rate rises.
The Bank’s losses are covered by cash transfers from the Treasury and have an impact on the government’s chosen fiscal rule to bring down a measure of the debt ratio within five years. There is growing speculation that Rachel Reeves, the chancellor, will adopt an alternative measure of the debt to exclude the impact of the Bank’s QT decisions at the budget on October 30, generating about £20 billion in extra fiscal headroom.
“The Office for Budget Responsibility had been assuming active sales of £48 billion, so the fact that the Bank will sell less gilts means fewer losses for the Treasury,” Elizabeth Martins, senior UK economist at HSBC, said. “That could open up a little more headroom for chancellor Rachel Reeves. However, that may be of less relevance, if she decides to switch to the debt measure.”
If the Bank maintains its current £100 billion QT pace until 2028, it will generate up to £96 billion in losses for the government over the next four years, according to figures from the New Economics Foundation.
The MPC has said that shrinking its balance sheet has little impact on its monetary policy stance, as it held interest rates steady at 5 per cent in September. The size of the balance sheet will fall to £558 billion in the next financial year and is down from a record of more than £800 billion recorded in 2022.
Katharine Neiss, chief European economist at PGIM Fixed Income, said: “A faster pace could have proven problematic in the future should the Bank need to go below neutral to stimulate the economy.”
If the Bank chose to sell back more gilts to the markets, at a total of £125 billion, it would have generated a £26 billion loss over the coming year, the New Economics Foundation said.
Senior Bank officials have said they want to drastically reduce the size of the balance sheet, selling gilts to protect the central bank from future interest rate risks and accumulating more losses. Cutting the level of excess reserves to the banking system, which is a legacy of years of quantitative easing, will reduce liquidity in the financial system.