By David Milliken
LONDON (Reuters) – The Bank of England should speed up the pace at which it is unwinding its 800 billion-pound ($1 trillion) stockpile of government bonds bought as part of its quantitative easing operations, Deputy Governor Dave Ramsden said on Wednesday.
Last September the BoE said it would reduce its gilt holdings by 80 billion pounds over the coming 12 months, split roughly equally between outright sales and not reinvesting the proceeds of gilts which mature.
Ramsden said financial markets had absorbed these bonds well, in addition to the BoE’s sale of nearly 20 billion pounds of corporate bonds, and there was little evidence of a big impact on gilt prices.
“For me personally, these factors support a carefully considered increase in the pace of reduction in the stock of gilts in the 12 months ahead,” he said in a speech to Britain’s Money Macro and Finance Society, hosted at the BoE.
The BoE is due to set out a new sales programme alongside its Sept. 21 interest rate announcement.
Gilt sales slightly tighten financial conditions at a time of high inflation, and create more headroom for stimulus by the BoE during an economic downturn or a financial crisis.
Ramsden said more gilts were due to mature from the BoE’s portfolio in the 12 months from September 2023 than in the 12 months before, meaning quantitative tightening (QT) could accelerate without increasing outright sales.
“Like the Monetary Policy Committee, I want QT to set a gradual and predictable pace for unwind and to let it operate in the background,” he said.
In May, Ramsden said the BoE was more likely to increase than decrease the pace at which it is unwinding the 875 billion pounds of government bonds it bought in quantitative easing operations between 2009 and 2021.
Ramsden said it was unclear how much the BoE would ultimately reduce its gilt holdings. Banks which were asked last year about where the BoE’s balance sheet would settle expressed a range of views from 325 billion to 480 billion pounds, he added.
“That’s quite a long way south of where we are now and implies that QT at this pace can go on for a while longer,” he said.
INFLATION STILL TOO HIGH
Ramsden voted with the majority on the BoE’s Monetary Policy Committee to raise the central bank’s main interest rate by half a percentage point to 5% last month as it sought to tackle the highest inflation among major advanced economies.
Earlier on Wednesday, official data showed British consumer price inflation dropped to a 15-month low of 7.9% in June, a bigger fall than financial markets had expected and one which brought inflation in line with the BoE’s most recent forecasts.
Financial markets now expect BoE rates to peak at 5.75% or 6%, down from 6.5% two weeks ago.
Ramsden said the strength of Wednesday’s market move showed investors’ sensitivity to incoming data, but that he did not want to say much about the outlook ahead of the central bank’s next rate decision on Aug. 3.
“CPI inflation has begun to fall significantly but remains much too high. The MPC has consistently stressed that monetary policy decisions will address the risk of more persistent strength in domestic wage and price settling,” Ramsden said.
The latest fall owed more to a drop in energy prices than the BoE had expected, while other elements of inflation which tended to be stickier remained elevated, he added.
($1 = 0.7752 pounds)
(Reporting by David Milliken, Editing by William Schomberg, Kylie MacLellan, Tomasz Janowski and Deepa Babington)
