Andrew Bailey has been urged by former Bank of England policymakers to ease pressure on the government’s borrowing costs by cutting back its bond-selling plans.
In a crunch week for the economy, four influential ex-members of the Bank’s monetary policy committee (MPC) said a change in course was needed.
Britain’s long-term borrowing costs have hit their highest level in 27 years, intensifying the pressure on chancellor Rachel Reeves before her 26 November autumn budget.
Threadneedle Street has blamed the rise on global factors, triggered by Donald Trump’s trade war and his assault on the independence of the US Federal Reserve.
However, the Bank admitted last month that a £100bn programme of bond sales to unwind its crisis-era quantitative easing (QE) scheme is also playing a role.
With the government under pressure on the economy, the central bank is widely expected to keep its base rate unchanged on Thursday at 4%, but could signal a slowdown in its bond-selling plans for the next 12 months.
The Bank’s decision comes in a busy week for economic news, with official data due on the jobs market and inflation, as Reeves gears up for a challenging autumn budget.
Michael Saunders, a former MPC member, now at the consultancy Oxford Economics, urged the Bank to scale back its disposals amid febrile conditions in markets.
“It is highly likely they will slow the pace … The gilt market and bond market in general are weak and volatile,” he said. “Current conditions are such that a higher pace of active sales might have an undesirable effect on pushing up yields further.”
A second ex-MPC member, who asked to remain anonymous, said: “It definitely has to be reduced. Not reducing it would be completely tone deaf to what’s happening in the global bond markets.”
Threadneedle Street intervened during the depths of the financial crisis to buy UK government bonds – aiming to crash borrowing costs close to zero – in a programme that was ultimately expanded up to reach £895bn in total.
The Bank is now winding down QE – a process known as “quantitative tightening” (QT) – and has shed about £100bn of bonds in the past year through active sales and allowing maturing debts not to be replaced.
It still has a portfolio worth about £560bn, having disposed of most of its holdings at a loss.
City investors widely expect the Bank to scale back its QT programme to about £70bn for the year ahead. However, this would involve maintaining active sales at current levels because fewer gilts are due to expire over the next 12 months.
Sushil Wadhwani, who was on the MPC between 1999 and 2002, called for a halt to active sales entirely amid worries over the impact of QT on the bond market.
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“On monetary policy grounds, the Bank should switch to passive QT [only allowing maturing debt to expire],” he said.
“Irrespective of what Andrew Bailey says, the 30-year yield has a significant impact on confidence in the UK economy. I have foreign investors bring it up all the time.”
Scaling back the Bank’s QT programme could help the chancellor by easing some of the pressure on long-term gilt yields. Such a step would also save the Treasury money because Threadneedle Street has been selling its bonds at a loss.
Andrew Sentance, another former MPC member, said cutting the Bank’s QT programme to about £70bn was sensible because markets expected such a reduction. However, he warned Reeves against banking on any windfall.
“The job of the Bank is not to make the chancellor’s life easy. Its job is to control inflation. And a modest winding back on QT would be quite consistent with that.”
The IPPR thinktank has estimated that halting active sales – matching the US Federal Reserve and European Central Bank – could save the Treasury more than £10bn a year.
However, holding onto the bonds would not be cost free, because the Bank earns less interest on its gilt portfolio than it pays out on commercial bank reserves.
Last month, the IPPR called on Reeves to raise taxes on the country’s biggest banks amid windfall profits on their reserves parked at Threadneedle Street. Some economists have also called for the Bank to pay lower rates of interest on some commercial bank reserves.