The Bank of England may revise plans to start selling gilts next month if it judges the market will struggle to digest the huge issuance needed to fund the government’s energy bill rescue scheme, Governor Andrew Bailey suggested in testimony to Parliament.
(Bloomberg) — The Bank of England may revise plans to start selling gilts next month if it judges the market will struggle to digest the huge issuance needed to fund the government’s energy bill rescue scheme, Governor Andrew Bailey suggested in testimony to Parliament.
Last month, the central bank said it intended to sell £10 billion of the gilts it owns every quarter under plans to shrink its swollen balance sheet by £80 billion a year. The plan is subject to approval at the BOE’s Sept. 15 meeting, but policy makers have the option to change course.
Speaking to the Treasury Committee on Wednesday, Bailey said that the amount of bonds the BOE plans to sell or the start date of the program could be reviewed in light of the energy bail out. Asked whether the BOE will take the government’s imminent package into account, he said: “We will do when we know what it is.”
Prime Minister Liz Truss, who took office yesterday, plans on Thursday to deliver a support package to households and businesses struggling with energy bills. Documents seen by Bloomberg suggest the scale of the program could reach £200 billion over the next 18 months, funded by borrowing through the bond market.
It’s possible that the support will be funded by state-guaranteed loans from private banks, as outlined under an proposal for industry. That would remove the need for major gilt issuance.
UK government bond prices have fallen in recent weeks, reflecting concern among investors about a big spending splurge from the Treasury that would require more sales. The pound has plunged against the euro and dollar, and gilt prices have sagged, pushing up yields.
Shreyas Gopal, a foreign exchange strategist at Deutsche Bank, said the pound could fall 15% if foreign investors “refuse to fund the UK external deficit.”
Markets stabilized on Wednesday, with 2-year bonds rallying after BOE officials testified at the hearing that the energy package could cut inflation in the short term. Traders read that as perhaps reducing the urgency of interest rate increases.
Traders trimmed bets for a 75-basis-point BOE rate hike at next week’s meeting. The yield on two-year gilts, which moves inversely to prices, fell 24 basis points to 2.96%. It’s set for the largest plunge since 2016.
Harriet Baldwin, a Conservative member of Parliament on the Treasury Committee, asked the governor whether there was a risk the volume of gilts sold could become “indigestible” and the whether the BOE’s gilt sales would be destabilize markets.
Bailey replied, “We have kept very open lines with the Treasury and the Debt Management Office, which I think is appropriate particularly from the point of view of the operational and market side of this. Our team keeps this under very close consideration.”
The DMO manages the government’s debt issuance.
Huw Pill, the BOE chief economist, said about the bailout plan that the “quantities that will be considered when we come to the confirmatory vote next week have taken that into account.”
The BOE wants to shrink its balance sheet, which expanded to almost £1 trillion pounds after £450 billion of quantitative easing during the pandemic. During that program, the BOE bought bonds to reduce market interest rates.
In a market notice on Sept. 1, the BOE said it will press ahead with active gilt sales, “subject to economic and market conditions being judged appropriate.” The bank added that it has the “right to amend its schedule, pricing method or any other aspects of its approach.”
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