Key Takeaways
- Bank of England pauses gilt sales for six months.
- It plans to cut bond holdings to zero by 2034.
- Treasury may buy £146 billion of long-dated gilts.
The Bank of England has paused gilt sales for six months and proposed a new plan to unwind its remaining bond holdings through 2034.
Bank pauses gilt sales
The Bank of England announced the changes on September 17 after its Monetary Policy Committee agreed on a multi-year plan for reducing its government bond holdings. The Bank currently holds about £488 billion of gilts in its Asset Purchase Facility.
The central bank will pause its gilt auctions while it works on the new approach. It also plans to stop selling long-dated gilts through the market as part of the revised process.
The Bank intends to reduce its holdings used for monetary policy to zero by 2034. It will do this through annual gilt sales of £20 billion alongside bonds that mature naturally. This would reduce the portfolio by an average of about £46 billion a year until the programme ends.
The Bank began reducing its bond holdings as part of quantitative tightening, or QT. The process reverses some of the bond purchases made during earlier periods of economic stress.
Treasury may buy £146 billion of gilts
The main change involves about £146 billion of gilts that mature between 2035 and 2049. The Bank is considering selling these bonds directly to the UK government rather than placing them with private investors through regular market sales.
Under the proposed model, the Treasury would instruct the Debt Management Office (DMO) to buy the gilts from the Bank. The DMO manages the UK government’s debt issuance and related market operations.
The Bank said the proposed sales would take place at market prices and follow a pre-announced schedule. The arrangement could allow the government to replace the bonds within its wider debt-management programme.
The Bank has not made a final decision on the model. It plans to review progress before April 2027. If the government-purchase model goes ahead, the DMO could include the transactions in its annual financing plans.
Most bonds will remain until maturity
The Bank will not sell all of its remaining gilts. It plans to keep about £222 billion of bonds that mature before 2035 until they reach maturity. It will also retain £120 billion of the longest-dated gilts to support the backing of current and future banknotes.
That leaves the £146 billion group for the proposed sales programme. The Bank expects annual sales to continue at £20 billion, with the remaining portfolio shrinking as other gilts mature.
The revised plan comes as UK government bond markets face higher borrowing costs. The yield on 30-year UK government debt recently reached its highest level since 1998 before falling after the Bank announced the sales pause.
The Bank also kept its Bank Rate at 3.75% on September 17. Its monetary policy committee voted 6-3 to maintain the rate, while all members supported reducing the stock of government bonds held for monetary policy purposes.
The new gilt strategy separates the long-term reduction of the Bank’s bond holdings from its main interest-rate tool. The Bank said it would change the planned pace only in specific circumstances, including if interest rates alone were not enough to meet its inflation target or if financial markets became severely distressed.
