BOE Dares To Suggest Central Banks Can Sell Assets

The Bank of England said Thursday that it plans to stop reinvesting the proceeds from maturing assets once the policy rate is at 0.5% and assuming such a shift is deemed “appropriate given the economic circumstances.”

That was notable. And so was the MPC’s contention that policymakers would consider actively selling bonds when rates are back to 1%.

“Reflecting its judgement that there are advantages to reducing the stock of purchased assets initially by ceasing reinvestments, the MPC envisages considering beginning the process of actively selling assets only once Bank Rate has risen to at least 1%, and depending on economic circumstances at the time,” the August Monetary Policy Report said, adding that “any asset sales would be conducted in a predictable manner over a period of time so as not to disrupt the functioning of financial markets.”

All policy settings were kept unchanged at the August meeting, but nods to the logistics around unwinding QE were good for at least a few headlines.

There’s nothing novel about the imagined sequencing. When you’re attempting to normalize the balance sheet, you stop reinvestment of maturing assets first which “allow[s] the reduction to occur at a gradual and predictable pace,” as the BOE put it. Then, never later, you might start to actively sell.

“Is this plan more aggressive than expected? On the Bank Rate threshold, we think 0.5% is roughly consistent with Governor Bailey’s past comments,” ING said Thursday. “But the speed of unwind has the potential to be a little quicker than we might have expected, assuming the BOE were to immediately stop all reinvestments – and indeed ultimately sell bonds back into the market,” the bank’s James Smith wrote.

I’ve variously (i.e., repeatedly) suggested that major central banks will never become active sellers, or at least not if they want to avoid triggering tantrums or otherwise upsetting various apple carts, many of which are top-heavy. But the BOE intends to give it a shot — assuming rates ever get back to 1%, that is.

Amusingly in that context, the new Monetary Policy Report officially added negative rates to the proverbial “toolkit.” “Previously, the MPC had judged that the ELB for Bank Rate was close to, but a little above, zero,” the bank said, adding that at the August meeting, the MPC was told that “technical preparations internally and by PRA-regulated firms had progressed sufficiently that a negative Bank Rate could be implemented by the system as a whole, with or without tiered reserve account remuneration, if warranted.”

Those of you who follow the BOE will note that negative rate discussions have been ongoing for quite a while. “The system” (as it were) was instructed to lay the groundwork for implementation “just in case.” The bank was careful to note that being prepared for such a scenario isn’t synonymous with wanting to go there. That isn’t the preferred policy path.

Inflation is seen rising to 4% in Q4, but don’t worry, it’s transitory. Or, “temporary,” as the MPC put it. The figure (below) illustrates how things are “supposed” to play out.

“CPI inflation was below the MPC’s target over much of the past two years, but it rose to 2.5% in June, and is expected to rise further in the near term,” the bank said, attributing the jump partly to energy and commodity prices.

“The MPC’s central projection is that higher cost pressures will be temporary such that inflation falls back towards the target,” the August report went on to suggest, although policymakers conceded that “there are uncertainties around that judgement.”

The UK is, of course, dealing with another COVID wave while simultaneously attempting to keep the economy open and avoid additional U-turns (and the backlash that typically accompanies containment protocol reversals). Cases are coming down from recent highs (figure below).

Summing up the situation, the BOE said Thursday that “should the economy evolve broadly in line with the central projections in the August Monetary Policy Report, some modest tightening of monetary policy over the forecast period is likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term.”

So, that’s the plan. And you know what they say about the best-laid plans.