Bank of England lessens the burden on Reeves by diminishing the pace of bond purchases
The Bank of England (BoE) has announced its decision to maintain the pace of Quantitative Tightening (QT) at £100 billion, despite growing concerns around economic activity and geopolitical risks. This decision is expected to moderate the upward pressure on the government's borrowing costs in the stock market.
Huw Pill, the BoE's chief economist, supported this decision, expressing his view that the market impact would be small. He voted against slowing down gilt sales, a move initially proposed by the Monetary Policy Committee (MPC) to reduce the stock of government bonds by £70 billion over the next 12 months.
The decision comes at a time when the yield on 30-year gilts hit 5.75 percent last month, its highest in 27 years. However, it has since fallen back to 5.43 percent. The BoE stated that the rise in bond yields could pose a risk that QT would have a greater impact on stock market functioning than previously.
Financial markets don't fully expect another cut in interest rates until April. The BoE had been expected to slow the pace of QT to ease the pressure on the government's long-term borrowing costs in the stock market. However, the BoE's decision to maintain the pace of QT is considered a piece of good news for Chancellor Rachel Reeves as she draws up her budget for next year.
Andrew Bailey, the BoE's governor, insists that interest rates are still trending down, but the Bank is being "gradual and cautious" in easing policy due to high inflation. He, along with Dave Ramsden, who had previously voted for a cut, changed their votes to "hold" at the MPC's latest meeting.
The £70 billion "envelope" for QT consists of £49 billion in bonds that will mature naturally and £21 billion of active sales. The BoE will sell fewer long bonds out of its portfolio this year, splitting sales 40:40:20 across the short, medium, and long maturity segments.
Swati Dhingra and Alan Taylor were the only two members who dissented from the majority opinion. The MPC kept the Bank Rate at 4 percent until its next meeting in November. The gilt market has been more volatile this year than its peers in the U.S. and Europe at times of global economic uncertainty.
Yields on bonds with maturities over 10 years have risen around the world this year due to growing concerns about the ability of governments to repay their debts. The BoE expects inflation to fall over the next couple of years, reflecting these domestic and geopolitical risks around economic activity in the stock market today.
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