Key facts
- The Bank of England is expected to slow its bond-selling program.
- Former Bank of England policymakers have urged the central bank to reduce its gilt disposals.
- Britain's long-term borrowing costs have hit their highest level in 27 years.
- The Bank of England has acknowledged its quantitative tightening program plays a role in rising borrowing costs.
- The Bank is expected to hold its base rate at 4%.
The Bank of England is reportedly set to slow its program of selling government bonds, a move that could help ease record-high borrowing costs for the UK government. Influential former members of the Bank's monetary policy committee (MPC) have called for a reduction in the pace of gilt sales, citing volatile market conditions and the impact on long-term yields.
Britain's long-term borrowing costs have reached a 27-year high, intensifying pressure on Chancellor John Healey ahead of his first budget next month. While the Bank has attributed some of the rise to global factors, it admitted last month that its quantitative tightening program is also playing a role. The central bank is widely expected to maintain its base rate at 4% this week but may signal a slowdown in its bond-selling plans for the next 12 months.
Former MPC member Michael Saunders noted that current market conditions suggest a higher pace of active sales could undesirably push up yields further. Another ex-MPC member, speaking anonymously, stated that reducing the pace is necessary given the state of global bond markets. Sushil Wadhwani, a former MPC member, advocated for a complete halt to active sales, suggesting a switch to passive quantitative tightening (allowing maturing debt to expire). He emphasized the significant impact of the 30-year yield on confidence in the UK economy.
Scaling back the quantitative tightening program could benefit the Treasury by reducing pressure on gilt yields and saving money, as the Bank has been selling bonds at a loss. Andrew Sentance, another former MPC member, deemed a reduction to around £70 billion sensible, aligning with market expectations. However, he cautioned that the Bank's primary role is inflation control, not necessarily making the chancellor's life easier.
The Bank's monetary policy committee (MPC) meets this week to decide the level of interest rates and whether to freeze or slow the sale of government bonds, known as gilts, bought as part of quantitative easing. The process of selling debt back to the market, known as quantitative tightening, aims to reduce inflationary pressures. However, the bonds are now worth less, so selling them crystallizes losses to the exchequer while increasing supply to the market, suppressing demand and pushing up the interest rate, or yield, charged on the debt.
The cost of government borrowing is already at multi-decade highs. On Monday, the yield on the benchmark 10-year gilt passed 5.4%, its highest level since July 2007, while the 30-year rose to 5.93%, its highest level since March 1998. In August, the Bank estimated its QT stance could result in total losses to the exchequer of £120bn if interest rates remain on the path expected by financial markets. Its governor, Andrew Bailey, has defended the policy, telling parliament's Treasury committee earlier this year that it was not in the MPC's remit to limit costs to the government in the short-term.