Bank of England defends gilt sales as balance sheet reduction continues
As the Bank of England continues unwinding crisis-era stimulus, Governor Andrew Bailey says reducing the central bank's holdings of British government bonds helps preserve room for future interventions. He argues the reversal of quantitative easing is appropriate now that the global financial crisis and the COVID-19 pandemic have passed.
Highlights
- Bank of England Governor Bailey defends ongoing gilt sales, asserting that reversing quantitative easing is justified after periods of severe market stress.
- Bailey states the financial impact of selling versus holding gilts to maturity is broadly neutral, countering criticism that gilt sales crystallise losses.
- Shrinking the gilt stock through quantitative tightening restores the Bank of England's ability to conduct future interventions, supporting policy flexibility.
Bailey sets out case for quantitative tightening
As reported by Reuters, Bailey writes in The Times that the BoE's earlier purchases of government debt, known as quantitative easing, are crucial in supporting the economy during periods of severe stress. He says those measures play an important role during the global financial crisis and the COVID-19 pandemic, but adds that reversing the policy is now justified.Bailey also pushes back on criticism of the central bank's bond sales, including claims that selling gilts crystallises losses. He says the overall financial impact does not change whether the bonds are sold or held to maturity, and adds that the combined cost of the BoE's quantitative easing and quantitative tightening operations is broadly neutral.
Political criticism and policy flexibility
His comments come after previous disagreements with Reform UK leader Nigel Farage over the BoE's handling of gilt sales and the absence of more business figures on its rate-setting Monetary Policy Committee. Bailey writes that some current critics of quantitative easing did not voice the same objections when the policy is introduced.He says monetary policy and financial stability matter for people across the UK, and argues the central bank must retain the right tools to respond effectively when needed. In his view, shrinking the gilt stock now restores the BoE's capacity to intervene again in a future crisis.
In our earlier article, we looked at how Andy Burnham’s possible Labour leadership bid and his tax and housing ideas could ripple through markets, with uncertainty helping push 10-year gilt yields to their highest level since 2008. We also noted that investors’ confidence in fiscal credibility matters for households, because swings in gilt yields can feed directly into fixed-rate mortgage pricing and broader borrowing costs.
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