MPCs cannot win in their defense.
It’s only a few months before the most important event on the UK monetary policy calendar (at least from the perspective of FT Alphaville) of the Bank of England’s Monetary Policy Committee gathers together to set the scale of its quantitative tightening operations for next year.
QT-The inverse of quantitative mitigation in which Bo runs his £600 million gold leaf stockpile is considered to be a virtually invisible process. As I reported previously, it’s not. In fact, it directly affects UK fiscal policy as a result of several combined factors.
There is an interest cost based on the gap between the average rate of return for asset purchase facility holdings (purchased when interest rates are low) and the bank charges paid to BOE reserves (currently standardized).
HM Treasury is necessary to compensate the BOE for the losses the APF has caused.
BOE’s selling gold leaf at a fairly high pace will curb prices, raise yields and make it more expensive for the UK to issue debts.
UK fiscal rules are bad, so all QUIDs are important.
There was a time when the QT was slow or no QT at all, or was fairly obviously the best option from a financial point of view (up to Rachel Reeves’ first budget last fall). Ending this process will make it cheaper for the UK to borrow pressure from HMT compensation to reduce it.
Now things are a little different. Reeves will fine-tune UK fiscal rules to focus on current spending, and since only the interest cost factor falls, this is what happens, creating headroom later in the OBR forecast, introducing more burdens into the gold leaf market and creating a sustained underlying foundation.
Currently, OBR expects active sales of £48 billion each year until the forecast (30/2029) ends, replenishing variable levels of passive reductions through Gilts maturation.
And as I wrote in March, those numbers are nonsense. It is merely a speculation born out of partial data, crude extrapolation, and analytical negligence.
However, the actual numbers probably won’t be different from this round. Even the stopped clock is correct twice a day, and the time has come for OBR.
With a passive sale of £49.1 billion in 2025/26, BoE will likely win £59 billion in active sales as it aims for another overall envelope of £100 million in QT.
And if that’s the case, as Borg’s Philip Aldrick and Greg Richie wrote last week, Reeves would be worth a few Bobs:
If banks are sticking to a £100 billion outflow, Reeves uses the UK chief economist, Budget liability figures, according to market pressure and aggressive sales of scrap, according to positive sales of debt.
Reeves has been found to acquire around £1.6 billion of extra headroom under a £100 billion spill annually.
Alphaville sees a very complicated opinion on which path the MPC takes. The Barclays signifies: “The path with the least resistance is hopeful that QT will continue at a £100 billion pace.”
Pantheon Macroeconomics believes QT is on track to the point that it doesn’t want to stop Active Sales, but look at a slowdown of £800 billion over the next year window.
Pooja Kumra of TD Securities believes there is an active sales potential.
. . . I don’t think that BOE should use active sales when the current bond sales program ends (OCT 24-Sep 25). The key risk is due to tightening of long-end financial position, which may require more attention to the pace of QT.
Much of this is conceptually at a lot of hinges on what the “stable state” of the Bank of England reserves is, and how quickly the MPC expects to get there.
Speaking in April, Chief Economist Huw Pill raised questions about whether QT would boost yields when the market was stressed. And on Monday night, Katherine Mann also stabbed her oars.
(On)Balance sheet normalization differs from policy rates, where central banks are in unknown territory. With theoretical derivation and empirical evidence, this has important monetary policy implications as we head towards our September decision on balance sheet outflows next year, given that we show we are away from the flat portion of the demand curve…
. . . The issue of monetary policymakers is less about the size of the balance sheet than normalization strategies, both in terms of remaining inventory and asset flows, and their associated impacts on financial conditions. As explained above, asset outflow and asset sales can affect financial communication by affecting different parts of the yield curve. If it’s big enough, this should be incorporated into my future interest rate decisions.
(It was the first time I realized Mann’s speech was in American English.)
Vicky Saporta, executive director of Boe’s Markets Director, will be talking again about bookings next week. This should be interesting too.
However, from a financial standpoint, there is a fundamental point that repeats (again). This is not important unless the OBR decides it.
There is no clear way to estimate future envelope sizes and their associated effects. If MPC decides to suspend active sales this year, we won’t be pretending to know what OBR should do, but certainly one thing can be said.
The longer OBRs do not adapt their processes to predict future active sales, the more likely they are to have a forecast-born headroom shock at future financial events. And it doesn’t help anyone.
