Latest news with #quantitativeeasing
Daily Mail
5 hours ago
- Business
- Daily Mail
Bank of England under pressure to slow £586bn QT push to ease long-term gilt yields
Its historic, knife-edge decision to cut interest rates captured headlines on Thursday, but the Bank of England could be about to make a far more consequential decision. Two rounds of voting and a narrow 5-4 decision to cut base rate by 25 basis points to 4 per cent underlined the dilemma facing the central bank, as it attempts to balance the UK's deteriorating economic performance with the potential for higher inflation. And it comes just as the BoE navigates arguably the most important period for monetary policy since failing banks were bailed out in the wake of the global financial crisis. In 2009, the BoE and other major central banks were forced to step in and buy hundreds of billions of pounds worth of government bonds amid fears of a total financial collapse. The process, known as quantitative easing (QE), effectively lowered long-term borrowing costs to support the economy and keep inflation down. The BoE would be forced to step in again with multiple rounds of QE during the eurozone crisis, the aftermath of Brexit and the pandemic, driving its gilt holdings to a peak of £875billion by 2022. But the bank is now unwinding its gilt holdings in a process known as quantitative tightening (QT), piling further pressure on long-term government borrowing costs. And 30-year gilt yields – the interest paid on government debt – have rocketed 85 basis points to 5.36 per cent over the last 12 months, while 10-year yields are up 60bps to 4.55 per cent. Yields, which move inversely to the price of a bond, largely reflect expectations for inflation – and therefore long-term interest rates – but it means the BoE is effectively selling into a market short on enthusiastic buyers. This is compounded by new gilts coming into issuance to help pay for the Government's spending priorities. Long-term government borrowing costs matter not just for the country's ability to finance it debts, but because they have a strong influence on mortgage rates. Slowing pace of QT 'unavoidable' On Thursday, the BoE said measuring the impact of QT on long-term gilt yields was challenging but estimated it was responsible for 15 to 25bps of growth, slightly higher than previous measurements. Georgina Hamilton, fund manager for the Polar Capital UK Value Opportunities Fund, said: 'The Bank's annual QT review moderately increased the impact of QT of UK gilt yields paving the way for a possible reduction of the pace of QT from £100billion to £60billion at the September vote. 'The BoE is taking a more aggressive approach that other major central banks in actively selling its bond holdings rather ran letting them mature passively. A softening of this approach should be help loosen tight long term credit conditions.' The bank's gilt stockpile is now expected to stand at £558billion by September 2025 after a planned £100billion of QT since October last year. But analysts at UBS said the first £100billion was 'easy' as it included £87billion of redemptions, which are passive and have a less intense market impact than sales. 'Passive' QT is expected to drop by £35billion next year and 'increasing active QT by that much is not an option', UBS warned. It added: 'Maintaining a QT target of £100billion would imply an increase in active QT from £9.3billion to £47.3billion. 'A step up of that size would likely be expected to have an unacceptable market impact. 'Looking ahead, passive QT slows further to around £40billion for several years. Tapering QT to limit the impact of active sales seems unavoidable.' ING analysts Padhraic Garvey and Michiel Tukker said there are other options for the BoE, but warned the outlook for UK borrowing costs would remain challenging. They wrote in a note: 'With plenty of liquidity still in the system, another way of addressing the concerns is by shortening the maturity of the bonds that are being sold. 'Whilst we think such solutions could help in the near term, the fact remains that the UK faces serious fiscal challenges and upward pressures on longer rates are a global phenomenon. Any such tweaks would not address the more (global) structural challenges faced by gilts.'
Daily Mail
28-07-2025
- Business
- Daily Mail
Opinion: Bank fears Farage turmoil in No 10
As a public figure, the governor of the Bank of England Andrew Bailey receives most attention from consumers and businesses alike for his role in setting interest rates . Critical as that is to national wellbeing, it has long been my belief that Bailey is more comfortable with the Bank's other, less discussed role of maintaining financial stability. Bailey was first to the battlements in his early days in office in March 2020 as the pandemic shut down Britain and much of the world. Bond markets in New York were in panic, and the Bank, led first by Mark Carney and then Bailey, moved to calm events. A currency swap deal with the US was activated, interest rates were cut to the bone and more money printing, through quantitative easing, was authorised. Bailey passionately urged government to take steps to prevent scarring to the economy. He was also at the tiller in the autumn of 2022 when Liz Truss 's tax-cutting mini Budget sparked a run on the pound and a sudden retreat from British government bonds. The scale and suddenness of the move caused ructions for pension funds which had used derivative products to gamble on returns. The episode had threatened, without Bailey's intervention, to cause a cascade of financial collapses among banks who had provided credit for the trades. The Bank of England became a butt of criticism, not least on these pages. Its twice-yearly Financial Stability Report had in the past warned of the potential danger of liability driven-investment products (LDIs) but neither the Bank nor the Pensions Regulator addressed the matter. It is one thing for the Financial Stability Committee to identify and warn of dangers to the financial system, but quite another to tackle a weakness and close it down. Bailey was in the Bank's engine room in the Great Financial Crisis of 2008, so has vast experience of dealing with fractures in the financial system and knows how rapidly contagion takes place. All this experience tells him that Chancellor Rachel Reeves' efforts to encourage growth, by deregulating the City, could be a huge error. It is a reminder of the light touch regulation in the run-up to the collapse of Northern Rock in 2007 and the crisis which followed. Readers of this month's Financial Stability document would find few clues to what Bailey believes is the most acute concern at present. It is not Trump tariffs or the present Government's borrowing needs, as serious as they may be. The governor's biggest worry is political uncertainty. It may seem mad to think that this should be the case given Labour's vast Commons majority and four more years in office. The significant statistic is that Nigel Farage's Reform UK has led the other parties in 65 consecutive polls. And the present kerfuffles in Epping and the record small boat arrivals in a long hot summer make the potential for a Farage journey to Downing Street ever more credible. Bailey and the independent Bank never indulge in party politics. But for the governor, pound sterling, the bond markets and the whole stability of the financial system, the number one threat is a big-spending populist released into Downing Street. Reach for the safety straps.
Daily Mail
27-07-2025
- Business
- Daily Mail
ALEX BRUMMER: Bank fears Farage turmoil in No 10
As a public figure, the governor of the Bank of England Andrew Bailey receives most attention from consumers and businesses alike for his role in setting interest rates. Critical as that is to national wellbeing, it has long been my belief that Bailey is more comfortable with the Bank's other, less discussed role of maintaining financial stability. Bailey was first to the battlements in his early days in office in March 2020 as the pandemic shut down Britain and much of the world. Bond markets in New York were in panic, and the Bank, led first by Mark Carney and then Bailey, moved to calm events. A currency swap deal with the US was activated, interest rates were cut to the bone and more money printing, through quantitative easing, was authorised. Bailey passionately urged government to take steps to prevent scarring to the economy. He was also at the tiller in the autumn of 2022 when Liz Truss's tax-cutting mini Budget sparked a run on the pound and a sudden retreat from British government bonds. The scale and suddenness of the move caused ructions for pension funds which had used derivative products to gamble on returns. The episode had threatened, without Bailey's intervention, to cause a cascade of financial collapses among banks who had provided credit for the trades. The Bank of England became a butt of criticism, not least on these pages. Its twice-yearly Financial Stability Report had in the past warned of the potential danger of liability driven-investment products (LDIs) but neither the Bank nor the Pensions Regulator addressed the matter. It is one thing for the Financial Stability Committee to identify and warn of dangers to the financial system, but quite another to tackle a weakness and close it down. Bailey was in the Bank's engine room in the Great Financial Crisis of 2008, so has vast experience of dealing with fractures in the financial system and knows how rapidly contagion takes place. All this experience tells him that Chancellor Rachel Reeves' efforts to encourage growth, by deregulating the City, could be a huge error. It is a reminder of the light touch regulation in the run-up to the collapse of Northern Rock in 2007 and the crisis which followed. Readers of this month's Financial Stability document would find few clues to what Bailey believes is the most acute concern at present. It is not Trump tariffs or the present Government's borrowing needs, as serious as they may be. The governor's biggest worry is political uncertainty. It may seem mad to think that this should be the case given Labour's vast Commons majority and four more years in office. The significant statistic is that Nigel Farage's Reform UK has led the other parties in 65 consecutive polls. And the present kerfuffles in Epping and the record small boat arrivals in a long hot summer make the potential for a Farage journey to Downing Street ever more credible. Bailey and the independent Bank never indulge in party politics. But for the governor, pound sterling, the bond markets and the whole stability of the financial system, the number one threat is a big-spending populist released into Downing Street. Reach for the safety straps.
Yahoo
15-07-2025
- Business
- Yahoo
Bailey warns Reform will make ‘no money' from Bank of England raid
Andrew Bailey has branded a Reform UK plan to overhaul the Bank of England's money-printing programme 'illusory' as he warned it will not deliver any taxpayer savings. The Governor of the Bank of England said the proposal to stop Threadneedle Street paying interest to commercial lenders would fail to generate the funds promised by the party. Reform, which is leading several polls, claims it could save up to £35bn a year by scrapping interest on reserves held at the Bank by commercial lenders. These reserves were created as part of the Bank's £895bn quantitative easing (QE) programme, which was used to boost the economy during the financial crisis and Covid. The Bank pays interest on these reserves at the base rate, currently 4.25pc. Reform wants to stop this money being paid out and use it instead to help fund an increase in the tax-free personal allowance to £20,000, as well as tax cuts for businesses. But Mr Bailey warned these savings were 'illusory', telling The Times: 'Please don't rely on that as income because it's not gonna be there.' The Bank's unwinding of its money-printing programme has come under increasing scrutiny owing to estimates that it could cost the taxpayer up to £150bn. The Telegraph revealed that Richard Tice, Reform's deputy leader, wrote to the Bank last month, accusing Threadneedle Street of prioritising bank profits over the interests of working people. Mr Tice said the unwinding of this programme, known as quantitative tightening (QT), was pushing up borrowing costs and piling pressure on the public finances. The Bank is reportedly preparing to fight back against accusations that QE did not provide value for money by publishing estimates of how much its bond buying reduced UK borrowing costs. Mr Bailey also published a five-page riposte to Mr Tice in which he warned that Reform's plan would hurt lending to the wider economy. He also warned that removing interest on reserves 'is akin to a tax on banks'. Mr Tice said he was planning to take up an offer by Mr Bailey to meet, although a date has not yet been confirmed He said: 'He is accepting my point on QT it sounds, which is good; and I look forward to discussing the interest payments when we meet. He does accept it is up for debate.' Mr Bailey also suggested last week that recent volatility in the bond market could change the way it sells its huge stockpile of UK debt going forward. The Bank is currently losing much more money on its stockpile of long-term debt because it is selling the bonds through QE evenly, resulting in steeper losses on long-term debt. While Mr Bailey would not be drawn on a looming decision in September, he said policymakers would 'look carefully' at how the rise in long-term borrowing costs 'plays into our decision'. Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month with unlimited access to our award-winning website, exclusive app, money-saving offers and more. Sign in to access your portfolio
Wall Street Journal
10-07-2025
- Business
- Wall Street Journal
Making Sense of the Fed's Monetary Madness
Joseph C. Sternberg could have stated the flaw in the Texas senator's thinking more directly ('Ted Cruz Stumbles on a Source of Monetary Madness,' Political Economics, June 27). The Federal Reserve is part of the federal government. Reserves and Treasurys are different forms of government liability. When the central bank buys Treasurys, the government isn't relieved of the burden of paying interest to the private sector; the part of the government paying interest simply shifts from the Treasury to the Fed. There is a simple reason the central bank has to be able to pay interest on reserves when it has created 'excess reserves,' such as in the balance-sheet-bloated aftermath of quantitative easing, and wants the federal funds rate to be in positive territory: Paying no interest would force the federal funds rate down to zero as banks futilely try to offload nonyielding reserves to one another, thus stymieing its monetary policy.
