The Bank of England is facing growing pressure to slow its quantitative-tightening program as renewed Middle East hostilities, heavy gilt supply and Prime Minister Andy Burnham's spending proposals weigh on the UK bond market. Governor Andrew Bailey has continued to argue that the central bank should reduce its bond holdings to create room for future quantitative easing and limit the interest-rate risk carried on its balance sheet. However, investors and economists are questioning whether the BOE should maintain that pace when its remaining gilt portfolio stands at 492 billion, UK borrowing costs are the highest among Group of Seven economies and 30-year gilt yields remain close to levels last seen in 1998.
The BOE began quantitative tightening in 2022 after accumulating 895 billion of assets to support the economy through the global financial crisis, Brexit and the pandemic. Unlike central banks that mainly allow bonds to mature without reinvestment, the BOE has also been actively selling gilts because a larger share of its portfolio consists of long-dated securities that could otherwise remain on its books for years. Active sales are set at 21 billion for the current QT year, while high bond maturities are expected to help reduce the balance sheet by 70 billion, but lower redemptions next year could require sales to rise to 40 billion if officials preserve the current overall pace.
Market participants instead expect the BOE to keep active sales near 20 billion and reduce the total annual runoff to roughly 50 billion, while some investors believe the program should be reduced further or stopped. The decision could matter for gilt investors because BOE sales are competing with government issuance at a time when pension-fund demand for long-dated debt appears to be weakening, potentially supporting a higher-for-longer yield environment. BOE analysis previously estimated that QT had added 15 to 25 basis points to 10-year gilt yields, while a more recent staff paper suggested the peak effect may have reached 40 basis points, a finding that HSBC NYSE:HSBC senior economist Elizabeth Martins said could support a slower pace of QT in September.