BoE to start reducing stock of bonds when policy rate hits 0.5%

MPC (Monetary Policy Committee) intends to begin to reduce the stock of purchased assets when Bank Rate has reached 0.5%

  

LONDON- The Bank of England kept the size of its bond-buying programme unchanged and held its benchmark interest rate at a historic low of 0.1% on Thursday but gave fresh clues as to how it would start weaning the economy off pandemic support.

The Bank said notably that it would start reducing its stock of bonds when its policy rate reaches 0.5% by not reinvesting proceeds and that it would consider actively selling down holdings when the rate reaches at least 1%.

Economists taking part in a Reuters poll had expected no immediate policy changes by the BoE, despite a post-lockdown rise in inflation.

The BoE said its Monetary Policy Committee voted 7-1 to keep its government bond-buying programme at 875 billion pounds ($1.22 trillion), with only Michael Saunders voting to scale back the programme.

The Federal Reserve's top policymakers are also showing signs of a split about how quickly the U.S. central bank might need to scale back its quantitative easing plan. 

The BoE's MPC voted unanimously to make no changes to its Bank Rate benchmark borrowing rate and to leave its 20 billion-pound stock of corporate bond purchases unchanged.

British inflation jumped to 2.5% in June and the BoE said in a new set of forecasts that it was on course to rise even further above its 2% target in the months ahead.

The central bank said it now saw inflation hitting a peak of 4.0% in late 2021 and early 2022. In May, it had forecast a peak of 2.5%.

But the BoE said those levels would prove to be temporary.

The BoE also said it still expected Britain's economy would grow by 7.25% in 2021, unchanged from its May forecast, but it raised slightly its estimate for growth in 2022 to 6% from the previous forecast of 5.75%.

The new guidance on cutting support was eagerly anticipated by financial markets.

"The MPC (Monetary Policy Committee) intends to begin to reduce the stock of purchased assets when Bank Rate has reached 0.5%, if appropriate given the economic circumstances, by ceasing reinvestments of maturing UK government bonds," the BoE said.

"The MPC will also consider beginning to sell actively some of the stock of purchased assets only once Bank Rate has risen to at least 1%."

The BoE's previous guidance, dating back to June 2018, stated that the BoE would not start to unwind bond purchases, and would reinvest the proceeds of maturing gilts, until the Bank Rate was near 1.5%. 

(Reporting by David Milliken and William Schomberg; writing by Mark John; editing by Toby Chopra) ((william.schomberg@thomsonreuters.com; +44 207 542 7778; Reuters Messaging: william.schomberg.reuters.com@reuters.net))


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