Former Bank of England policymakers have urged governor Andrew Bailey to ease pressure on the government’s borrowing costs by scaling back or halting the central bank’s bond-selling programme. Four ex-members of the Bank’s monetary policy committee (MPC) said the move was necessary as Britain’s long-term borrowing costs reach their highest level in 27 years, adding strain ahead of chancellor Rachel Reeves’s 26 November autumn budget.
While global factors, including trade tensions and uncertainty over the US Federal Reserve, have contributed to rising yields, the Bank acknowledged that its £100bn programme of quantitative tightening (QT) is also playing a role. The Bank is expected to keep its base rate at 4% this week, but may signal a slowdown in bond sales over the next year.
Michael Saunders, former MPC member, said continuing active sales at the current pace could push yields higher in volatile markets. Sushil Wadhwani recommended switching to passive QT, allowing only maturing bonds to expire, while another ex-MPC member stressed that failing to reduce sales would be “tone deaf” to market conditions.
The Bank, which bought UK government bonds during the financial crisis in a programme that reached £895bn, has already shed about £100bn in the past year and still holds around £560bn. City investors expect QT to scale back to £70bn in the coming year, though active sales may remain high if fewer gilts mature.
Scaling back QT could relieve pressure on long-term yields and save the Treasury money, as bonds have largely been sold at a loss. The IPPR estimates halting active sales could save over £10bn annually, though holding onto bonds has costs, since interest earned is less than what the Bank pays on commercial bank reserves.
Andrew Sentance, another former MPC member, said modest reductions in QT would be consistent with the Bank’s focus on controlling inflation, while providing some relief to government borrowing costs. Last month, the IPPR also suggested raising taxes on major banks to offset windfall profits from reserves parked at Threadneedle Street.
