The Bank of England has confirmed it will push ahead with selling £80bn of UK government bonds from the start of next month, a day later than planned, despite fears over choppy conditions in financial markets after the mini-budget.
The central bank said it would delay the start date to 1 November to avoid a clash with the government announcing its debt-cutting plan, which is due on Halloween.
The decision to push ahead comes despite swirling speculation that Threadneedle Street could be forced into a lengthier delay in order to smooth over turmoil in bond markets after Kwasi Kwarteng’s ill-received mini-budget.
Earlier on Tuesday, the Bank had dismissed a report in the Financial Times that it was set to delay the sale of bonds built up under its quantitative easing programme since the 2008 financial crisis, amid concerns over turbulence in the gilt market.
The process to scale back the £838bn of bonds – or gilts – on its balance sheet is known as quantitative tightening (QT), considered by economists to be one of the Bank’s most powerful tools for tackling inflation, which recently rose to its highest rate in 40 years.
Questions have been raised after the market meltdown sparked by Kwarteng’s mini-budget last month. The FT said the start of the process would be delayed, with the Bank’s top officials of the view that gilt markets had been “very distressed” in recent weeks.
However, a spokesperson for the Bank said the report was inaccurate, which led to a rise in borrowing costs on UK government debt in early trading. The yield – or interest rate – on UK government bonds fell back later on Tuesday and was little changed compared with a day earlier.
Threadneedle Street was forced to intervene in markets to protect pension funds from the market turmoil earlier this month with a promise to buy up to £65bn of gilts on the grounds of financial stability. The intervention ended on Friday after the Bank’s governor, Andrew Bailey, insisted the scheme must close.
The Bank’s monetary policy committee has previously acknowledged it would only begin government bond sales “subject to economic and market conditions being appropriate”, but said at its last meeting in September, the day before the mini-budget, that it should proceed as planned.
Gilt yields fell on Monday after Jeremy Hunt’s move to scrap most of the unfunded tax cuts contained in the mini-budget, although they still remain higher than the levels they were at before his predecessor’s statement.
The Bank said it would focus on selling short- and medium-term debt, including gilts with a residual maturity of up to 20 years. This would mean the Bank is steering clear of longer-dated bonds, which had risen sharply in value after the mini-budget and were the biggest source of concern over financial stability.
The Bank said it would “continue to monitor market conditions closely, and where appropriate factor that into the design of its sales operations”.
