Borrowing costs surge as Bank of England forges ahead with bond sale - wima space
Sun. Oct 2nd, 2022
Borrowing costs surge as Bank of England forges ahead with bond sale

UK borrowing costs have risen faster than any other major country in the last month as market jitters over the new government’s more relaxed fiscal policy mount.

Some analysts had raised doubts over whether the Bank would push ahead with bond sales under quantitative tightening (QT) after the recent plunge in gilts fueled by fears of excessive borrowing.

However, the Bank has revealed that around half of the £80bn bonds will mature over the next 12 months and not be reinvested. About £40bn of gilts will be sold, including almost £9bn in the final three months of 2022.

Allan Monks, economist at JPMorgan, said: “There had been more uncertainty about this in light of significant and unanticipated new government issuance in the coming months. But ultimately the size of the sales at around £10bn per quarter was deemed small enough (by design) to minimise any potential conflict with the DMO [Debt Management Office].”

It will be the first sale of gilts built up by the Bank under quantitative easing (QE), the bond-buying blitz started in 2009 to prop up the economy. Threadneedle Street became a major buyer of government debt again when the pandemic struck.

ING economist James Smith said the fiscal bazooka fired by Ms Truss’s government and the bond sale “mean private investors will have to absorb a record amount of gilts”.

He said: “We understand the Bank’s willingness to show that its balance sheet reduction plan won’t be scuppered by market volatility but we continue to argue that current gilt market conditions warrant greater attention.”

The Bank’s rate-setters unanimously voted to push ahead with the gilt sales despite highlighting the “sharp increase in government bond yields globally” and the faster rises in UK yields since the previous meeting.

The Bank also put more upward pressure on borrowing costs by pushing up interest rates by a further 0.5 percentage points to 2.25pc.

QE calmed UK bond markets when the pandemic struck by snapping up huge amounts of gilts. However, gilt yields have risen rapidly in recent months as the Bank increases interest rates and market jitters emerged over the UK’s fiscal policy under Ms Truss.

Stefan Koopman, strategist at Rabobank, said: “This leaves the British government in the peculiar situation of not having borrowed enough when global interest rates were low, and of borrowing a lot when global interest rates are high.”

Bailey bets that Truss’s energy bailout will save Britain from rocketing inflation

By Szu Ping Chan

Friday’s mini-Budget marks the end of more than a decade of heavy economic lifting by the Bank of England, with Chancellor Kwasi Kwarteng instead taking up the baton.

In the years since the 2008 financial crisis, record low interest rates kept the economy supported while successive Governments pressed ahead with reforms.

But when the new Chancellor stands up Friday morning to unveil measures designed to break Britain’s ‘cycle of stagnation”, the Bank will for the first time in years take a back seat when it comes to driving growth. Instead, the Government will be tasked with the job.

Threadneedle Street is rapidly raising rates in a bid to tame inflation, leaving Kwarteng to support the economy.

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By wissem

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