What could the Bank of England do to rid the UK economy of stimulus? By Reuters

© Reuters. FILE PHOTO: The Bank of England and Royal Exchange are reflected in a puddle as a pedestrian walks past amid the coronavirus (COVID-19) outbreak in London, UK, Nov. 19, 2020. REUTERS/Simon Dawson/File Photo

LONDON (Reuters) – Two top Bank of England officials surprised investors this week by saying the time may be approaching for the British central bank to rein in the massive stimulus program it has used to steer the economy through the coronavirus crisis.

With activity rebounding sharply and inflation rising faster than expected, Vice Governor Dave Ramsden said on Wednesday that the BoE may consider tightening monetary policy sooner than he previously thought.

On Thursday, Monetary Policy Committee member Michael Saunders went even further, warning that holding on to the BoE’s entire £895 billion ($1.24 trillion) bond purchase program would risk higher inflation expectations if the recovery moves quickly. would continue.

On Friday, a group of lawmakers told the BoE to explain why it did not phase out its stimulus.

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 stimulus measures.

And the central bank is well aware how the US Federal Reserve’s talk of merely slowing down bond purchases in 2013 sparked a “taper tantrum” that sharply drove borrowing costs in financial markets and forced the Fed to stress. that there was no rush.

Below is a summary of the ways the BoE could choose to take its foot off the stimulus accelerator.


The BoE decided in November to buy another £150 billion in British government bonds. That emerged just days before the announcement of a major breakthrough in COVID-19 vaccine development that suddenly sparked hopes of recovery.

The BoE has about £60 billion in gilts to buy until the program is completed.

MPC member Saunders said curtailing the program would be discussed at the next committee meetings, which will announce its final policy decisions on Aug. 5, and that it could be curtailed over the next two months.

Economists at bank HSBC said they didn’t think a majority of MPC members would vote to cut the program in August, although it would likely slow the pace of purchases to allow the program to run through the end of 2021 as planned.


Another option for the BoE is to complete its bond-buying program and then shrink its inventory by not reinvesting the income from maturing debt into more bonds.

Vice Governor Ramsden said this week the BoE could decide not to reinvest any of its maturing debt or make a partial reinvestment.

The BoE could similarly shrink its £20 billion corporate bond portfolio, which has already reached its target size.


A quicker way to slow down the economy would be if the BoE sold some of the accumulated bonds.

Given the magnitude of the BoE’s presence in the bond market – its holdings of UK government bonds, or government bonds, now account for 40% of Britain’s annual economic output – a direct sale of government bonds would be a big step. It is seen as an option to advance in the economic recovery, likely once the BoE has started raising interest rates.


The BoE cut bank rates to an all-time low of 0.1% in March 2020 at the start of the coronavirus crisis.

Even early this year, before the recovery started, policymakers discussed the pros and cons of cutting benchmark rates below zero for the first time.

With the economy growing rapidly, investors expect bank interest rates to rise to 0.25% by August next year.

BoE officials have emphasized that when the time comes to raise borrowing costs, they expect them to rise gradually and bank rates are likely to remain well below the 4-5% levels that were common before the global financial crisis of 2008- 09.

The BoE will announce later this year how it might monitor rate hikes with steps to reduce the size of its balance sheet. Earlier, the BoE said it would wait for bank rates to hit 1.5% before divesting bonds.

($1 = 0.7217 pounds)

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