4 Minute Read by Reuters Staff (Reuters) – LONDON (Reuters) – Two top Bank of England officials stunned investors this week when they said the moment may be coming for the British central bank to scale down its massive stimulus package that has helped the economy through the coronavirus crisis. PHOTO FROM THE FILE: The Bank of England and the Royal Exchange are reflected in a puddle as a pedestrian walks by in London, Britain, on November 19, 2020, during the coronavirus illness (COVID-19) outbreak. FILE PHOTO: REUTERS/Simon Dawson With economic activity rebounding robustly and inflation rising faster than predicted, Deputy Governor Dave Ramsden said on Wednesday that the Bank of England may begin to consider tightening monetary policy sooner than originally anticipated. Michael Saunders, a member of the Monetary Policy Committee, went even farther on Thursday, warning that continuing with the Bank of England’s entire 895 billion pound ($1.24 trillion) bond buy program risked entrenching higher inflation expectations if the recovery accelerated. A group of legislators demanded that the Bank of England explain why it was not winding down its stimulus program on Friday. The road ahead, however, is far from clear. Because the Bank of England does not know how many jobs will be lost when the government’s wage subsidy scheme stops in September, MPC members are wary of reducing stimulus. And the central bank is well aware of how the US Federal Reserve’s announcement in 2013 that it would only slow bond purchases sparked a “taper tantrum,” driving up borrowing prices in financial markets and forcing the Fed to emphasize that it was not in a hurry. The following is a rundown of the options available to the Bank of England if it decides to ease off on the stimulus pedal. CUT THE CURRENT BOND-BUYING PROGRAMMET IN HALF In November, the Bank of England planned to purchase another 150 billion pounds of British government bonds. That was just a few days before the news of a big breakthrough in the development of the COVID-19 vaccine, which boosted recovery expectations. The Bank of England still has around 60 billion pounds worth of gilts to purchase before the program is completed. MPC member Saunders said the program’s curtailment would be reviewed at the committee’s next meetings, which are set to unveil their newest policy decisions on Aug. 5, and that it might be cut in the next month or two. According to economists at HSBC, a majority of MPC members are unlikely to vote to shrink the program in August, however it is likely to slow the pace of purchases in order for the program to endure until the end of 2021 as planned. PURCHASE ALL THE BONDS AND THEN LET THEM RUN. Another option for the Bank of England is to finish its bond-purchase program and then allow its stockpile shrink by not reinvesting maturing debt proceeds in new bonds. Deputy Governor Ramsden indicated this week that the Bank of England could opt to reinvest all or part of the maturing debt. Similarly, the Bank of England may allow its 20 billion pound corporate bond portfolio, which has already reached its target size, to deplete. SELL BONDSA faster method to slow the economy would be for the Bank of England to sell some of its bonds. Given the Bank of England’s heft in the bond market – its holdings of British government bonds, or gilts, currently account for 40% of the country’s yearly economic output – outright gilt sales would be a significant step. It is viewed as a possibility for later in the economic recovery, most likely when the Bank of England has begun to raise interest rates. INTEREST RATES SHOULD BE INCREASED When the coronavirus epidemic hit in March 2020, the Bank of England reduced the Bank Rate to an all-time low of 0.1 percent. Before the economy took off earlier this year, authorities were debating the benefits and drawbacks of dropping the benchmark rate below zero for the first time. With the economy growing at a rapid pace, investors are expecting the Bank Rate to rise to 0.25 percent by August of next year. Officials from the Bank of England have stated that when the time comes to raise borrowing costs, they expect to do so gradually, with the Bank Rate likely to remain well below the 4-5 percent levels seen prior to the global financial crisis of 2008-09. The Bank of England is expected to announce later this year how it plans to combine rate hikes with efforts to shrink its balance sheet. The Bank of England has previously stated that it will not sell bonds until the Bank Rate reaches 1.5 percent. (1 dollar = 0.7217 pounds) William Schomberg wrote the piece, and Catherine Evans edited it./n
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