New Bank of England guessing game begins
The UK central bank on Thursday raised its key policy interest rate by a quarter of a percentage point to 0.5%. That’s the level that Bailey said last year rates would have to reach before he would start to allow bonds to mature without reinvesting the proceeds in the debt market.
While Bailey is ahead of his global peers on this front, shrinking the BoE’s 895 billion pound portfolio of gilts and corporate debt will be a drawn-out affair. That’s just as well, since central bank debt purchases have kept a lid on bond yields even as governments issued huge amounts of debt as they battled to shield the economy from the effects of the pandemic.
Yet an orderly unwind may be tricky. Persistently high inflation may force the BoE to consider selling bonds, rather than just letting them mature. ING analysts reckon just 25 billion pounds of gilt sales could have the same effect as a 12.5 to 25 basis point rate hike. Moreover, Bailey won’t be acting alone. The U.S. Federal Reserve is keen to shrink its own $9 trillion balance sheet.
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