Bank of England set to become first big central bank to sell QE bonds

The BoE’s Monetary Policy Committee said on Thursday it was “provisionally minded” to start sales in the second half of September, subject to economic and market conditions and a confirmatory vote at its next meeting on Sept. 15.

Deputy Governor Dave Ramsden told a news conference that there would be a “high bar” to amending gilt sales due to market conditions, once the programme had begun.

The BoE does not expect the gilt sales to play a significant role in tightening monetary conditions, relative to raising interest rates or the initial gilt purchases, but wants to ensure it has scope to undertake QE again if needed.

HSBC economists said the sales should not have much impact on gilt yields “if well communicated”, but there was a risk of volatility due to a lack of short-dated gilts in Britain’s repo market.

As part of Thursday’s announcement, the BoE said it would set up a new weekly 7-day short-term repo facility to keep market rates close to its Bank Rate.

“Other central banks with hefty balance sheets will be watching on with interest at the BoE’s pioneering move,” HSBC economists Liz Martins and Simon Wells said.

The BoE doubled the size of its QE programme during the COVID-19 pandemic but stopped reinvesting the proceeds of maturing gilts in February, since when its portfolio has shrunk to 844 billion pounds, from 875 billion pounds.

However, the long average maturity of its holdings compared with other major central banks such as the U.S. Federal Reserve means it needs to undertake active sales if it wishes to reduce its holdings faster.

Governor Andrew Bailey said last month he expected the BoE would seek to reduce its gilt holdings by 50-100 billion pounds in the first year of quantitative tightening.

The BoE said on Thursday it expected to cut its holdings by 80 billion pounds in the year from September, through gilts maturing and 10 billion pounds of sales per quarter.

Sales will be timed to avoid clashes with the United Kingdom Debt Management Office’s gilt auctions.

The sales will largely mirror the BoE’s purchases, which were made through reverse auctions of buckets of gilts with maturities of 3-7 years, 7-20 years and more than 20 years. ($1 = 0.8241 pounds)