Monetary authorities at the Bank of England moderate the £558bn bond disposal plan due to escalating long-term gilt yields.
Bank of England Slows Down Quantitative Tightening, Causing Uncertainty in Long-term Gilt Yields
The focus of market attention has shifted towards the outlook for 'quantitative tightening' (QT), a process that sees the Bank of England offload hundreds of billions of pounds worth of government bonds held on its balance sheet.
During the peak of Quantitative Easing (QE) in 2022, the Bank of England amassed £875 billion in gilt holdings. However, the Bank has now decided to slow the rate of its £558 billion debt sell-off scheme. On November 23, 2022, the Bank reduced its sales target of government bonds from £100 billion to £70 billion to stabilize financial markets after a sharp rise in gilt yields caused market disruptions.
Long-term government borrowing costs matter significantly for the country's ability to finance its debts and have a strong influence on mortgage rates. These concerns have motivated policymakers to re-examine the program of bond sales and slow down the pace of QT.
The impact of the slowdown in QT on long-term gilt yields is uncertain. It remains to be seen if this will lead to a decline in gilt yields. A steepening of the long-dated gilt curve could create an additional headache for the Treasury ahead of the Budget, as it would have an impact on government borrowing.
Long-term Government borrowing costs have risen sharply, placing pressure on Britain's public finances and the economy. Brad Holland, director of investment strategy at J.P. Morgan's Nutmeg, expressed concerns about further bond sales from the Bank of England potentially increasing losses and steepening the long-dated gilt curve.
QT has contributed to a rise in long-term government borrowing costs. It is worth noting that the Bank of England's base rate remains at 4%. The current value of gilts on the Bank of England's Asset Purchase Facility balance sheet is £558 billion.
The BoE is unloading its enormous government bond holdings through QT. MPC members voted by a margin of 7-2 to reduce the rate of bond sales to £70 billion. The slowdown in QT is a significant development that market participants are closely watching, as it could have a significant impact on the UK's financial landscape.
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