BOE to start its delayed bond sales next month

Bloomberg

The Bank of England (BOE) will start its delayed bond sales early next month, refocusing on the fight against record inflation after averting the threat of a market meltdown.
The announcement of so-called quantitative tightening is a statement of intent from the central bank, which had been on the defensive for weeks after fallout from a government plan for massive unfunded tax cuts forced it to start buying gilts again in order to avoid a fire sale by pension funds. The sales will initially exclude the long-dated debt at the heart of recent market turmoil triggered by the government’s
ill-fated fiscal plans.
The market chaos had been a major distraction for a central bank trying to focus on monetary tightening to tame soaring inflation. It’s already raised interest rates multiple times this year and stopped reinvesting proceeds from maturing bonds in its portfolios. Governor Andrew Bailey said “there may appear to be a tension” between that effort to slow price gains the emergency decision to buy bonds again.
Starting QT puts the inflation fight back at the center of the bank and allows the BOE to step further back from any appearance of government financing in a boost for its credibility.
The impact of the decision was clear in the gilt market on Wednesday. Shorter-term gilts fell as the central bank’s decision thwarted hopes for an outright delay to sales, while longer-dated gilts rose as they drew support from the BOE’s tweak to the plan. The yield on 30-year bonds fell seven basis points to 4.24%, while 10-year rates climbed eight basis points to 4.02%.
Bailey isn’t entirely ignoring his financial stability responsibilities. The new sales plan is a pragmatic compromise, allowing him to stick to a plan to unwind a mammoth balance sheet while protecting the stability he’s brought to the longer-end of the market.
“This is still a punchy plan under current market conditions,” said Krishna Guha, head of central bank strategy at Evercore ISI. “The bank sees pressing ahead with substantial QT as essential to uphold its independence and credibility amid the UK’s
fiscal misadventures.”
The BOE started intervening in late September when a surge in bond yields after the fiscal announcement threatened to cause disruption at some pension funds, with potential fallout across the UK financial system.
The pound has also been on a rollercoaster in recent weeks, at one point dropping to a record low against the dollar, though it’s since recovered ground. And the tax plans cost Kwasi Kwarteng his job as chancellor of the exchequer, ousted by Truss after just 38 days.
With a new chancellor, Jeremy Hunt, now in place and a new fiscal policy focused on ensuring public debt declines in the medium term, Bailey is signaling that his efforts to shrink the central bank’s balance sheet are back on track.
The BOE currently holds about £840 billion ($950 billion) of government bonds, built up as part of stimulus measures during economic slumps. Before the pensions fright, its most recent purchases had come during the recession sparked by the Covid pandemic.
Sales were initially due to begin on Oct. 3, but were delayed to Oct. 31 during the market disruption. The BOE is now pushing the start back by one more day to avoid a clash with the announcement of the government’s revamped fiscal program.
When it announced QT, the BOE said it planned to reduce its balance sheet by around £80 billion a year through active sales and redemptions, a pace that implied around £10 billion of selling per quarter.
According to the announcement, bond sales this quarter will now be distributed evenly across the short and medium maturity sectors only. It expects to conduct sales at a similar size and frequency as had been previously announced. Any shortfall as a result of the earlier delay will be incorporated into subsequent quarters.