Borrowing costs in the UK rose faster than any other major country last month as the market freaks out over the new government’s looser fiscal stance.
Some analysts have expressed doubts as to whether the Bank will promote bond sales in a quantitative tightening (QT) environment following the recent fall in securities prices fueled by concerns about over-borrowing.
However, the Bank said that about half of the £80bn of bonds will be redeemed over the next 12 months and will not be reinvested. Around £40bn of gilts will be sold, including nearly £9bn in the last three months of 2022.
Allan Monks, an economist at JPMorgan, said: “There has been more uncertainty about this in light of significant and unanticipated new government issuance in the coming months. But ultimately, sales of around £10bn per quarter were deemed small enough (by design) to minimize any potential conflict with DMO. [Debt Management Office]”.
This will be the first sale of securities created by the Bank under the quantitative easing (QE) program, which began in 2009 to support the economy. Threadneedle Street was once again a major buyer of government debt when the pandemic hit.
ING economist James Smith said the fiscal bazooka launched by Ms Truss’s government and the bond sale “mean private investors will have to gobble up a record amount of securities.”
He said: “We understand the Bank’s willingness to demonstrate that its balance sheet reduction plan will not be undermined by market volatility, but we continue to argue that current market conditions require more attention.”
The Bank’s rate-setters voted unanimously to continue selling the securities despite highlighting the “sharp increase in government bond yields worldwide” and faster growth in UK yields since the previous meeting.
The bank also increased upward pressure on borrowing costs by raising interest rates by another 0.5 percentage points to 2.25%.
Quantitative easing calmed the British bond markets when the pandemic broke out, snapping up huge amounts of securities. However, stock yields have risen rapidly in recent months as the Bank raised interest rates and market turmoil over Ms. Truss’s UK fiscal policy.
Stephan Koopman, strategist at Rabobank, said: “This puts the British government in the peculiar situation of not borrowing enough when global interest rates were low and borrowing a lot when global interest rates are high.”
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Friday’s mini-budget marks the end of more than a decade of hard economic recovery for the Bank of England, replaced by Chancellor Kwasi Kwarteng.
In the years following the 2008 financial crisis, record low interest rates propped up the economy as successive governments continued to push through reforms.
But when the new chancellor rises on Friday morning to announce measures to break Britain’s “cycle of stagnation”, the Bank will take a backseat for the first time in years when it comes to spurring growth. Instead, the government will be entrusted with this work.
Threadneedle Street quickly raises rates in an attempt to tame inflation, leaving Quarteng to support the economy.