The decision by the Bank of England (BoE) to hold rates at 4% was hardly headline grabbing, but its position on slowing quantitative tightening caught the eyes of many investors.
The bank is currently reducing its stock of gilts at a pace of £100bn a year, with the balance of gilts not naturally maturing in any year being made up for with sales of bonds into the market. The bank reduced the pace of balance sheet reduction to around £70bn per annum.
“The bank’s announcement that it will allow £70 billion of gilts to roll off its balance sheet was broadly in line with our expectations, albeit meaning that active gilt sales will have to step up to £21 billion,” said George Brown, senior economist at Schroders.
It will naturally have market implications. “Reducing the proportion of gilts sold into the market should reduce the upward pressure on long-term yields as these sales currently compete with gilt sales from the Debt Management Office,” said Chris Arcari, head of capital markets at Hymans Robertson.
Risks in the near-term about this announcement are two sided, Arcari said. “Disappoint on the scale of reduction and yields might rise. Do more than the market expect and yields might fall.”
John Wyn-Evans, head of market analysis at Rathbones, noted how this is encouraging.
“This is certainly a positive development and relieves some of the supply pressure from the market,” he said. “Further good news is that the bank will focus on selling more bonds with shorter maturities and only 20% of sales will be from longer-duration issues with maturities beyond 2055 – versus around a third previously.”
He also said it is a good sign that the bank is sticking to its independent guns.
“The Bank of England is displaying its independence at a time when investors are nervous that central banks are at risk of succumbing to control from political leaders, with the battle between the White House and the US Federal Reserve being most critical,” Wyn-Evans said.
Initial market reaction, with bond yields marginally higher and sterling a touch weaker, seem to suggest some possible disappointment that the bank did not go further with its relaxation of quantitative tightening, or perhaps some disappointment that it remains on a more gradual course when it comes to loosening policy.
Divisions with the Monetary Policy Committee (MPC) also potentially tells us something about the future trajectory of interest rates.
“The divide in the Bank of England MPC vote last time round has convinced the markets that we’re not going to get another rate cut for a while, and that when they eventually come, they may be smaller and more spaced out,” said Mark Hicks, head of active savings at Hargreaves Lansdown.
Although given the picture it also means that a decrease, or even an increase, in rates is possible. “We continue to expect rates to remain on hold this year and next, but we can’t rule out the possibility that the bank’s next move will be up, rather than down,” noted Brown.
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