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What could the Bank of England do to wean the UK economy off the incentives?

LONDON, July 16 (Reuters) – Two senior officials from the Bank of England surprised investors this week by saying that the time for the UK central bank may come to curb the huge stimulus package it is pushing the economy through the coronavirus crisis has controlled.

With economic activity rebounding strongly and inflation rising faster than expected, Deputy Governor Dave Ramsden said Wednesday that the BoE may consider tightening monetary policy earlier than previously thought. Continue reading

On Thursday, policy committee member Michael Saunders went further, warning that sticking to the BoE’s full £ 895 billion ($ 1.24 trillion) bond purchase program could risk entrenching higher inflation expectations if the recovery is so rapid persists. Continue reading

On Friday, a group of lawmakers called on the BoE to explain why it was not weakening its incentives. Continue reading

But the way forward is far from clear.

The BoE doesn’t know how many jobs will be lost if the government ends its wage subsidy program in September, so MPC members remain cautious about removing the incentives.

And the central bank is well aware that the Fed’s talk of merely slowing bond purchases caused a “taper rage” in 2013 that drove up borrowing costs in the financial markets and forced the Fed to shut down emphasize that she is in no hurry.

The following is a summary of the ways the BoE could choose to get off the stimulus accelerator.


The BoE decided in November to buy an additional £ 150 billion in UK government bonds. This emerged just days before the announcement of a major breakthrough in COVID-19 vaccine development that suddenly raised hopes for a recovery.

The BoE still has around £ 60 billion in gilts to buy before the program is completed.

MPC member Saunders said the limitation on the program will be discussed at the next meetings of the committee due to announce its latest policy decisions on Aug. 5, and that it could be limited in the next month or two.

HSBC bank economists said they didn’t believe a majority of MPC members would vote to reduce the program in August, though it would likely slow the pace of buying to extend the program as planned through to the end of 2021.


Another option for the BoE is to complete its bond purchase program and then reduce the size of its holdings by not reinvesting the proceeds from debt maturing in more bonds.

Deputy Governor Ramsden said this week that the BoE may decide not to reinvest any of the debts due or to do a partial reinvestment.

Likewise, the BoE could cut its £ 20 billion corporate bond portfolio, which has already reached its target size.


A quicker way to slow the economy down would be for the BoE to sell some of the bonds it has accumulated.

Given the size of the BoE’s presence in the bond market – their holdings of UK government bonds or gilts now account for 40% of the UK’s annual economic output – selling gilts directly would be a big step. It is seen as an option for the further development of the economic recovery, likely once the BoE starts raising rates.


The BoE lowered the key interest rate in March 2020 at the beginning of the coronavirus crisis to an all-time low of 0.1%.

This year, before the recovery got underway, politicians were talking about the advantages and disadvantages of lowering the key interest rate below zero for the first time.

Now that the economy is growing rapidly, investors are pricing in a rate hike to 0.25% by around August next year.

BoE officials have stressed that when the time comes to hike borrowing costs, it will gradually rise and bank interest rates are likely to stay well below the 4-5% levels that were common prior to the 2008-09 global financial crisis .

The BoE will announce later this year how it could sequence rate hikes with measures to reduce total assets. The BoE had previously announced that it would wait for bank rates to hit 1.5% before selling bonds.

($ 1 = 0.7217 pounds)

Letter from William Schomberg; Editing by Catherine Evans

Our Standards: The Thomson Reuters Trust Principles.

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