How the Bank of England could start to reverse its huge stimulus – .

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How the Bank of England could start to reverse its huge stimulus – .


LONDON, Aug. 2 (Reuters) – The Bank of England may this week shed some light on how – and when – it could reverse its ten-year stimulus package, even if it continues to buy bonds for now. as part of its 895- billion pound quantitative easing program.

The BoE has been working since February on how to start tightening its policy. It is expected to be among the first of the world’s major central banks to begin the process of weaning its economy from stimulus measures.

The BoE said its review of how to coordinate or sequence a hike in interest rates and sales of its government bond stock would not signal an impending policy change. Instead, he wants to guide the public and the markets on his future plans.

The BoE’s benchmark discount rate is at an all-time high of 0.1% and its bond purchases, which began in 2009 during the global financial crisis, are approaching 40% of gross domestic product, or double from before the pandemic.

WHEN IS THE EXAM D?

The BoE said it will publish the review before the end of 2021. Many economists expect it to accompany its latest policy announcement and forecast on Thursday. BoE politician Gertjan Vlieghe said on July 26 that the review would come “soon”.

WHAT IS THE CURRENT BOE POLICY?

Current forecasts, which date back to June 2018, indicate that the BoE will not begin to unwind QE and will reinvest the proceeds from maturing gilts until the discount rate is close to 1.5%. .

WHY CHANGE THE CURRENT ORIENTATION?

Existing forecasts make it unlikely that the BoE will start unwinding QE before the next downturn, and over time its holdings could represent an ever larger share of the bond market.

Rates have fallen globally since 2018 and five-year gilt yields hover around 0.3% – well below around 1.2% when the forecast was released – suggesting markets are not expecting to that the BoE’s rates will hit 1.5% anytime soon.

Governor Andrew Bailey called the guidelines “too prescriptive.” He wants to ensure that the BoE has sufficient leeway – in the form of bonds available for purchase from investors – to deal with future crises.

Some lawmakers argue that the scale of QE distorts financial markets and gives the impression that the BoE is financing government spending, undermining its credibility.

HOW HAS THE BOE ANALYSIS EVOLVED SINCE 2018?

The BoE set the 1.5% threshold to ensure it could cut rates significantly if the economy needed help after it started unwinding quantitative easing.

At the time, the floor on which the BoE’s rates could fall was estimated at 0.25%. But the BoE said in February that it was possible to cut rates below zero, giving itself leeway to start selling bonds earlier than expected.

Bailey also referred to the “state” impact of QE. Rather than always having the same effect on yields, bond purchases can take them down sharply in times of market turmoil, while a slow selling pace in calm times might exert little pressure on the market. increase in borrowing costs.

HOW COULD THE DIRECTION CHANGE?

The main focus for investors is the threshold of the discount rate at which the BoE could begin to reverse QE, turning the market’s biggest government bond buyer into a major seller.

The options include:

– Lower the discount rate threshold to 0.5% -0.75%

This would be a fairly conservative option and effectively take into account a new lower bound for the discount rate from -0.5% to -0.75%. Citi analysts say it’s probably the expectation of consensus in bond markets. Bond sales are reportedly far away: markets don’t price the BoE at 0.5% before the end of 2023, while reaching 0.75% could happen until 2027.

– Lower the threshold to 0.25%

This could allow the BoE to start reversing QE at the end of 2022. Markets are currently forecasting a first rate hike of 0.15 percentage point to 0.25% by August 2022. Most economists believe that it will be later. Long-term bond yields would likely rise relative to medium-term bond yields on this news, Citi predicts.

– Fully scrap threshold

This would be the more drastic option, allowing the BoE to start reversing QE before raising rates, possibly as early as 2022, shortly after the current buyout program ends.

This might appeal to policymakers who fear that a rate hike could derail the recovery, but believe that a modest pace of bond sales would do little to drive up borrowing costs.

COULD BOE JUST STOP REINVESTING MATURING GILGETS?

One way for the BoE to reduce its holdings in gilt without selling bonds is to simply stop buying new ones when existing bonds mature, as the U.S. Federal Reserve did in 2017.

While simple, this would lead to an uneven pace of tightening, with £ 34bn of bonds maturing in 2022 and 2023, dropping to £ 74bn in 2025 and falling to £ 50bn in 2026.

The BoE may prefer to set targets for reducing bond holdings and pursue some reinvestment or maintain additional sales if necessary. It would also give him better control over how yields move for different bond maturities.

($ 1 = 0.7191 pounds)

Reporting by David Milliken Editing by William Schomberg and Christina Fincher

Our Standards: The Thomson Reuters Trust Principles.

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