The Bank of England has announced it is scaling back the rate at which it is selling bonds into the financial market as part of its quantitative tightening programme. The Bank’s Monetary Policy Committee (MPC) voted to leave interest rates unchanged at 4% at its September meeting, but more controversial still is its annual decision over the reversal of its crisis-era quantitative easing programme.
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Over the last two years, the Bank has been in the midst of actively selling off bonds bought during the financial crisis and COVID-19, as part of its economic rescue measures. Today, the Bank announced it is reducing the annual sale rate to £70bn a year. It has also announced it will, in future, be selling fewer long-dated government bonds. «The new target means the MPC can continue to reduce the size of the Bank’s balance sheet in line with its monetary policy objectives while continuing to minimize the impact on gilt [government bond] market conditions,» said governor Andrew Bailey.
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On the interest rate decision, Mr. Bailey said, «We held interest rates at 4% today. Although we expect inflation to return to our 2% target, we’re not out of the woods yet so any future cuts will need to be made gradually and carefully.»
He later added: «There will be some further reductions but… the timing and scale of those is more uncertain now.» The decision was not unanimous, with two of the seven MPC members voting to cut the base interest rate by 0.25 percentage points.
While the market expects rates to be held again at the next meeting in November, a cut in December is still seen as likely by traders, according to data from the London Stock Exchange Group (LSEG). It is not, however, fully priced in. John Wyn-Evans, head of market analysis at investment firm Rathbones, said: «This meeting was another milestone on the road to what is scheduled to be the most important event between now and Christmas, namely the budget. The government would dearly love to see lower interest rates to stimulate the housing market and consumer demand more generally. However, the Bank of England is displaying its independence at a time when investors are nervous that central banks are at risk of succumbing to control from political leaders, with the battle between the White House and the US Federal Reserve being most critical. This leaves Chancellor Rachel Reeves struggling to balance the books, and her task will be made even more difficult should reports that the Office of Budget Responsibility is set to reduce its forecast for the UK’s productivity growth be proved correct. Although we expect inflation to return to our 2% target, we’re not out of the woods yet so any future cuts will need to be made gradually and carefully.» He later added: «There will be some further reductions but… the timing and scale of those is more uncertain now».
The decision to reduce the annual sale rate of bonds and sell fewer long-dated government bonds was not unanimous within the MPC, with two of the seven members voting to cut the base interest rate by 0.25 percentage points.
While the market anticipates that interest rates will be held again at the next meeting in November, traders still see a cut in December as likely, according to data from the London Stock Exchange Group (LSEG). However, it is not fully priced in.
John Wyn-Evans, head of market analysis at investment firm Rathbones, commented on the recent meeting, stating: «This meeting was another milestone on the road to what is scheduled to be the most important event between now and Christmas, namely the budget. The government would dearly love to see lower interest rates to stimulate the housing market and consumer demand more generally. However, the Bank of England is displaying its independence at a time when investors are nervous that central banks are at risk of succumbing to control from political leaders, with the battle between the White House and the US Federal Reserve being most critical. This leaves Chancellor Rachel Reeves struggling to balance the books, and her task will be made even more difficult should reports that the Office of Budget Responsibility is set to reduce its forecast for the UK’s productivity growth be proved correct.»
The Bank of England’s decision to scale back its bond sales marks a significant shift in its policy as it navigates the economic challenges posed by the pandemic and its aftermath. The reduction in the annual sale rate and the focus on selling fewer long-dated government bonds reflect a cautious approach to unwinding the quantitative easing measures put in place during times of crisis.
Governor Andrew Bailey emphasized the importance of maintaining the Bank’s balance sheet while minimizing disruptions to the government bond market. The MPC’s decision to keep interest rates unchanged at 4% underscores the Bank’s commitment to supporting economic recovery while remaining vigilant against inflationary pressures.
As the Bank continues to monitor economic conditions and adjust its policies accordingly, the path forward remains uncertain. With expectations of further reductions in bond sales and potential interest rate cuts on the horizon, the financial markets are bracing for continued volatility and uncertainty in the months ahead.
Overall, the Bank of England’s recent decisions reflect a delicate balancing act between supporting economic growth and safeguarding against potential risks. As the UK economy grapples with ongoing challenges, the Bank’s actions will play a crucial role in shaping the country’s recovery trajectory in the months and years to come. Although we anticipate that inflation will eventually return to our 2% target, we are not completely in the clear yet. Therefore, any future rate cuts will need to be implemented gradually and with caution.
He later added: «There will be some further reductions but… the timing and scale of those is more uncertain now.»
The decision to hold interest rates was not unanimous, as two out of the seven MPC members voted to decrease the base interest rate by 0.25 percentage points.
While the market predicts that rates will remain unchanged at the next meeting in November, a cut in December is still considered likely by traders, based on data from the London Stock Exchange Group (LSEG). However, it is not fully priced in.
John Wyn-Evans, head of market analysis at investment firm Rathbones, remarked: «This meeting marks another step on the path to what is expected to be the most significant event before Christmas, which is the budget. The government is hoping for lower interest rates to boost the housing market and consumer demand. However, the Bank of England is demonstrating its independence at a time when there are concerns about central banks being influenced by political leaders, particularly the ongoing tension between the White House and the US Federal Reserve. This puts Chancellor Rachel Reeves in a challenging position as she tries to manage the budget, especially if reports of the Office of Budget Responsibility reducing its forecast for UK productivity growth are accurate.»
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