Speculation is growing the Bank of England will surprise economists by signaling an increase to the pace of bond sales as it looks to reduce its outsized footprint in the market.
Officials may say as soon as Thursday they will start shrinking their balance sheet at a faster pace, according to analysts at firms including Capital Economics and BNP Paribas. The BOE halted reinvestments of its maturing gilts and has been actively selling bond sales since September, targeting a £80 billion annual portfolio reduction.
While most economists expect the overall target to be raised because there are more gilts maturing in the coming year, an increase to outright bond sales could catch the market off guard. Capital Economics says the pace could increase to £120 billion, with bond sales almost doubling to £70 billion.
The out-of-consensus view gained traction after deputy governor Dave Ramsden said last month he sees scope to step up the pace of QT to give policymakers more “headroom” to act again in a crisis. The BOE currently holds about £800 billions of bonds accumulated over years of quantitative easing programs to support the economy.
“The Bank has learnt that well-telegraphed gilt sales don’t destabilize the market,” said Paul Dales, chief UK economist at Capital Economics, encouraging the BOE to press on at a faster clip.
UBS and Nomura forecast the pace of QT will increase to £100 billion, while BNP Paribas and Goldman Sachs expect it to be raised to £95 billion and £90 billion respectively, due to higher bond redemptions. There are around £50 billion in gilts held by the BOE set to mature over the next year, versus £35 billion in the previous year.
A “carefully considered increase” to £100 billion per year would result in “steeper curves and tighter asset-swap spreads,” said UBS analysts including Anna Titareva, who expect the BOE will wait until September.
The QT program aims to reduce the BOE’s bloated balance sheet, which remains well above pre-pandemic levels despite a £100 billion unwind over the past year. By removing liquidity in the market, it could also help tighten financial conditions.
Still, BOE officials have flagged the economic impact has been limited, with interest-rate hikes remaining the key tool to fight inflation that is still running above target. They are expected to raise rates by a quarter point on Thursday, with some economists forecasting a larger half-point hike.
QT also appears to have helped ease concerns about gilt scarcity in repo markets, where they are used as collateral, according to Ramsden. An increase in the pace may further free up supply.
‘Elevated Supply’
“We can expect short-term gilt repos to cheapen further given the ongoing QT which, together with the elevated supply, should alleviate short-term gilt scarcity,” Morgan Stanley strategist Fabio Bassanin wrote in a note.
The BOE said it will confirm QT details for the year ahead in September, but it could give markets a provisional plan a month ahead as it did last year. RBC Capital Markets analysts don’t expect a new QT target to be announced until the September decision, while others see it coming earlier.
“We expect the BOE to follow its 2022 playbook on QT” by annoucing its QT plans in August, BNP Paribas analysts including Matthew Swannell wrote in a note. Ramsden’s comments suggest that “the pace of active sales has been conservative” meaning the risks are skewed toward a larger program, they said.
--With assistance from Andrew Atkinson and Alex Mortimer.
(Adds UBS comment starting in sixth paragraph. An earlier version of this story corrected BNP Paribas’ QT forecast.)
