Smooth Start to BOE's Active Quantitative Tightening... Interest Rates Fall Despite UK Gilt Sales

Bank of England [Photo by Reuters Yonhap News]

[Asia Economy Reporter Park Byung-hee] The Bank of England (BOE), the central bank of the United Kingdom, smoothly initiated 'active' quantitative tightening on the 1st (local time).

From that day, the BOE began selling its government bonds regardless of maturity. Contrary to initial concerns, there was no market disruption caused by the BOE's sale of government bonds. The BOE sold ?750 million worth of short-term government bonds, with bids exceeding ?2.4 billion, indicating strong demand for government bond purchases.

As a result, the yield on 1-year UK government bonds in the secondary market fell by 0.10 percentage points from the previous day to 2.91%, and the 10-year government bond yield dropped by 0.05 percentage points to 3.46%.

The BOE began quantitative tightening in February, the first among major central banks, by reducing its holdings of government bonds, but until now, this was conditional on bond maturities. In other words, until now, the BOE reduced its holdings by not reinvesting the proceeds from matured bonds into other bonds, but from this day forward, it started selling bonds that had not yet matured. The BOE described this as active quantitative tightening. The BOE is the first major central bank to sell bonds before maturity. The U.S. Federal Reserve (Fed) began quantitative tightening in June but has so far only refrained from reinvesting proceeds from matured bonds.

Initially, after the large-scale tax cut plan by former Prime Minister Liz Truss's cabinet on September 23, the UK government bond market experienced significant turmoil, raising concerns that quantitative tightening by the BOE could cause even greater market disruption. The BOE actively responded by purchasing ?19 billion worth of long-term government bonds over two weeks to counter market turmoil but maintained its policy to proceed with quantitative tightening. However, it decided to delay the quantitative tightening schedule somewhat and exclude long-term government bonds, which were the cause of market turmoil, from the sale list to reduce market disruption.

Despite the BOE's bond sales, the UK government bond market showed stable trends, which can also be interpreted as confidence in the fiscal policies of the new Prime Minister Rishi Sunak's cabinet. While former Prime Minister Truss's announcement of large-scale tax cuts caused concerns about the government's fiscal deficit, the Sunak cabinet is reportedly preparing a tightening plan worth ?50 billion annually. The Sunak cabinet is expected to announce a medium-term fiscal plan including the tightening measures on the 17th.

Daniela Russell, an investment strategist at HSBC, predicted that the BOE would proceed cautiously with the quantitative tightening process given its unprecedented nature. However, Russell added, "It is currently difficult to be certain about the impact of active quantitative tightening on the market, and it may take several months."

Since the 2008 global financial crisis, the BOE has repeatedly implemented quantitative easing policies, significantly increasing its holdings of government bonds. The BOE currently holds approximately ?850 billion worth of UK government bonds and plans quantitative tightening at an annual scale of ?80 billion.

This content was produced with the assistance of AI translation services.