Bank of England begins selling government bonds
The Bank of England has begun to shrink its £838bn stockpile of government bonds in a bid to reduce the central bank’s emergency stimulus to the economy and fend off claims that it has lost its independence by directly financing government borrowing.
Ahead of a meeting on Thursday when the Bank is expected to raise its base rate by as much as one percentage point to 3.25%, officials offloaded £750m of government bonds, known as gilts, to commercial banks and insurers as part of a plan to sell £80bn by the end of next year.
The move marks a major turning point at Britain’s central bank, which is seeking to increase the cost of borrowing to bring down an inflation rate that hit 10.1% in September.
Despite fears that the UK government has tarnished London’s reputation in the last month as a haven for investors, the sale was oversubscribed and boosted gilt markets, pushing the interest rate on the benchmark fiveyear bond down 0.04% to 3.56%.
The governor Andrew Bailey delayed the sale in the aftermath of Liz Truss’s mini-budget, which triggered panic in financial markets, depressed the demand from investors for UK loans and sent the interest rate on fiveyear bonds above 5%.
Mortgage lenders have reacted by pushing up mortgage loan rates above 6% on two-year fixed deals, leaving many homebuyers facing thousands of pounds a year in higher annual payments.
The national debt is more than £2tn, owed to a mix of foreign investors, pension funds and the Bank of England. Since 2008 the government has come to rely on Threadneedle Street to step in during crisis periods as a buyer of last resort.
Under a programme called quantitative easing (QE), the Bank has bought increasing amounts of government debt that reached a peak of £875bn in 2020.
In the budget later this month the government is expect to announce that it needs about £170bn of extra borrowing to finance the energy price cap, higher interest bills and to cope with the likelihood of a recession next year.
Last week Sir Robert Stheeman, the chief executive of the Debt Management Office, which arranges gilt sales, said: “The market is clearly volatile, it’s stressed, and I don’t think we should pretend otherwise,” adding that volatility had been sparked by UK-specific factors.
“We do not want to be that little wildebeest who strays too far away from the herd, but if we can get back into the herd, and if we can be viewed as anything but an outlier, that is obviously important.”
Bailey is the first boss of a major central bank to actively sell bonds to the open market. The US Federal Reserve has so far preferred to not repurchase short-term loans when they mature as it seeks to reduce a £9tn QE mountain.
By contrast, most gilts have a long maturity and so it would take many years to reduce the stock by allowing loans to lapse.
Analysts said allowing the auction to go ahead was a mark of confidence that markets are calm and able to absorb the extra bonds.
Some international agencies fear that a sharp increase in the cost of borrowing by the Fed, the European Central bank and the Bank of England via a combination of higher interest rates and a reversal of QE, dubbed quantitative tightening, will push the global economy into recession next year.
The International Monetary Fund has called on central banks to coordinate their plans to withdraw cheap credit to minimise the impact on economic growth.
The World Bank has warned that a swift move to higher interest rates will hit many developing economies without giving them time to find the funds to pay higher debt bills.
Many have taken on huge loans to tackle poverty and issues related to climate change.
The IMF has said it was concerned that the number of countries seeking financial support had increased sharply since the pandemic and financial issues were likely to become more acute if interest rates continue to climb.