Liz Truss is navigating uncharted waters – without the support of the Bank of England


But at the same time as the Bank turns from big buyer to big seller, there are signs that foreign investors are less inclined than they once were to hold sterling assets.

The pound fell more than the euro against the dollar. Bank of England figures indicate foreign investors sold gilts at near the fastest pace on record in July, although monthly numbers could be volatile.

Deutsche Bank’s Shreyas Gopal says “significantly” higher yields on gilts may be needed to entice international investors to fund large-scale borrowing.

This is not a sign of market dysfunction, as in March 2020, but simply the price to pay for issuing huge amounts of debt. All of this makes the Bank’s pressure to unwind its huge bond balance sheet all the more sensitive.

Since March, the central bank has stopped reinvesting the funds freed up when the bonds it holds come due, leaving the total stock it holds to drop from a peak of £875bn of government bonds to less than £850 billion, as well as almost £20 billion in corporate bonds. The pace should pick up after the next meeting of the Monetary Policy Committee (MPC).

If the MPC votes along the lines of the proposals tabled last month, it will start selling £10bn of bonds per quarter, doubling the rate at which it is shrinking its gilt holdings. That means finding buyers for £80bn worth of gilts a year, on top of new government-issued bonds.

Harriett Baldwin, Conservative MP on the Treasury Committee, calls the onset of active quantitative tightening (QT), as gilt sales are known, a “watershed moment”. Ensuring that the markets can digest the volume of bonds depends on “well-planned” coordination of sales by the government and the Bank through the Debt Management Office.

“The key to a successful issuance is predictability, giving the market a clear direction as to when you’re going to sell,” she says.

Bailey said the Bank was coordinating bond sales, amid fears the market could be overwhelmed with issues if Threadneedle Street and the government both tried to sell large amounts at the same time.

“We have maintained very open lines of communication with Treasury and the Office of Debt Management, which I think is appropriate, particularly on the operational and market side,” the governor told MPs last week. .

During the Covid crisis, Bailey was accused of being too close to the government. He was accused of effectively funding the state, printing money to be given to the Treasury to fund the gigantic Covid-imposed bill.

“There is a widespread perception, including among large institutional investors in public debt, that funding government deficit spending was an important reason for quantitative easing during the Covid-19 pandemic,” a survey concluded. of the House of Lords on the actions of the Bank.

Bailey denies this. The Bank’s official response said the alleged “widespread perception” was “unfounded” and that QE was “entirely consistent with fiscal and monetary policymakers pursuing their objectives independently in response to a weaker economy.”

Now is Bailey’s chance to prove that independence.

Huw Pill, the Bank’s chief economist, said he hoped to set a course for bond sales “in a predictable way” that could continue “in the background”, and when economic events change, policymakers can instead react with the overall interest rate.

“We control the general stance of monetary policy by operating through the discount rate,” he told MPs.

So far, the government does not seem too concerned about the situation.

Simon Clarke, the upgrade secretary, described the 3% rate on 10-year gilts as “perfectly sustainable”, with “much more demand for our debt than was needed to cover the last sale at auction”.

For now, rising rates are attracting investors. Truss can cover the shortfall, just at increasing cost. The question is whether this can be maintained indefinitely.


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