Bank of England bond sales could free up billions for Labour

The Bank of England could ramp up the speed of its bond sales this month in a significant move for the chancellor’s spending plans before the budget on October 30.

The Bank’s monetary policy committee will decide the pace of its “quantitative tightening” programme this month for the next 12 months, as it shrinks its balance sheet by selling gilts back to financial markets and allows existing bonds to mature without reinvestment.

The decision over the pace of quantitative tightening has big implications for the government as the Bank is losing billions of pounds on its bond sales, with the losses covered by the Treasury. The scale of the losses in the coming years will affect the amount of fiscal headroom that Rachel Reeves has to meet her target to reduce debt ratio over a five-year rolling period. The Bank has estimated that ending active bond sales altogether would free up £10 billion in headroom for the government.

Despite the fiscal implications, some analysts expect the Bank to speed up its bond selling over the next 12 months. Economists at JP Morgan expect the pace of quantitative tightening to increase from £100 billion to £120 billion, while analysts at Deutsche Bank said the Bank would opt for £127 billion, which would involve selling £40 billion of gilts back to the market. The rate of maturing bonds is estimated at £87 billion over the next year.

Should the Bank speed up its bond sales, it will raise expectations that Labour will change the debt measurement used in its fiscal target to exclude financial losses made by the Bank. This decision could give the chancellor upwards of £20 billion in headroom, nearly tripling the estimated £9 billion measured at the last budget in March, according to City analysts.

Michael Saunders, a member of the MPC until 2022, said Reeves was likely to shift the debt measure to one that excludes capital losses made by the Bank, stripping out the impact of QT on the public finances.

“The logic is that the government’s fiscal space will not be impacted by the Bank’s decisions on QT. This would free up some £17 billion a year in headroom,” Saunders said. He said the additional windfall from changing the debt measure would probably be banked by the chancellor rather than spent at her first budget.

“This will show that Reeves is being super-tough on meeting her debt rule, but it also gives her protection against any changes to the OBR’s [Office for Budget Responsibility’s] projections. It also makes life easier for the Bank and allows them to carry out QT at whatever pace they want.”

Jeremy Hunt, the former chancellor, accused the government last week of “planning to fiddle the fiscal rules, leading to a massive increase in borrowing and debt with hard-working taxpayers left to pick up the tab”.

Analysts said that changing the debt measure would not raise alarm in financial markets and could strengthen the independence of the Bank from political and fiscal pressures.

“There will be broad acceptance in the markets as it shows that the Bank’s QT’s decisions are not a binding constraint on fiscal policy and that the government and the Bank can make independent decisions,” Sanjay Raja, chief UK economist at Deutsche Bank, said.

He added that the bond market could absorb the Bank’s gilt sales, given the “record appetite for [UK government debt]. I don’t think this is an issue as long as market conditions are moving as expected.”