Latest news with #BoE
Reuters
2 days ago
- Business
- Reuters
Bank of England poised to slow QT after rise in yields
LONDON, July 28 (Reuters) - The Bank of England is expected to soon slow the pace at which it shrinks its 558 billion-pound ($754 billion) holdings of government bonds, and economists hope next week will shed some light on its longer-term goals for the stockpile. Alongside a predicted quarter-point interest rate cut to 4%, the BoE's Aug. 7 policy statement will assess the past year's quantitative tightening, or QT, before policymakers decide in September on the pace of bond sales for the following 12 months. There is greater uncertainty over QT than usual due to recent bond market ructions and because liquidity in Britain's financial system is approaching a balanced level for the first time since before the 2008 financial crisis. Adding to the mix is political pressure over the hefty losses the BoE has made when selling bonds. "The official view from the Bank ... is that they see this as an operation that works almost in the background. But clearly it has come to their attention that they are not operating in a vacuum," said Peter Schaffrik, global macro strategist at RBC. Unlike other big central banks, the BoE's QT programme involves bond auctions as well as letting existing holdings mature. Over the past year, it has sold 13 billion pounds of gilts and let 87 billion pounds mature. Keeping up that 100 billion-pound pace for the next 12 months would require it to sell a record 51 billion pounds though, due to fewer redemptions. Schaffrik said market conditions had changed since it last sold close to 50 billion pounds of gilts, however, which was in the year to September 2024. "The market would probably take it quite negatively if they sold such a large amount," Schaffrik said. The BoE itself has said its sales so far have barely pushed up government bond yields. A BoE survey published in May showed investors mostly expected QT to slow to a yearly 75 billion-pound pace from September and to 50 billion in 2026-27 before active sales effectively end in 2028. One outlier is BNP Paribas' Europe economist Dani Stoilova, who expects the BoE to stop gilt sales from October onward to avoid impacting the market. British 30-year government bond yields hit their highest levels since 1998 in April after President Donald Trump's tariff bombshell rocked the markets and the BoE had to postpone a bond sale. Despite four BoE rate cuts over the past year, the difference between five- and 30-year gilt yields has doubled to 1.4 percentage points and the 2/10-year yield curve has steepened to 0.75 percentage points from near zero. "Active QT has never been done in this environment where Bank Rate has been falling. And so there is the potential that there are interaction effects that haven't been caught," Stoilova said. Last week BoE Governor Andrew Bailey said QT was not to blame for higher government borrowing costs. "We do need to look, however, at the interaction of those yield curve movements with the QT programme and with market functioning and with monetary policy impact," he said. The BoE might focus more on shorter-dated gilt sales or even halt sales of gilts with a maturity of 20 years or longer, former Monetary Policy Committee member Michael Saunders said. Equally, the BoE could decide that extra rate cuts are a better option, or that there is little it can do to offset the steeper yield curve, said Adam Dent, chief UK rates strategist at Santander CIB. "We believe that QT is only responsible for a small part of the steepness, so trying to use QT to control the slope should also have little lasting effect," he said. The BoE has said little about its long-term plans for its gilts. One of Bailey's original reasons for QT - which drains money from the financial system - was to lower banks' reserve holdings from excess levels. Reserves stand at around 680 billion pounds, well above the 385-540 billion-pound range bankers gave to the BoE as an estimate of the system's preferred minimum range of reserves. Once reserves hit this minimum level, the BoE might still see financial or market stability reasons to keep selling gilts and require banks to make greater use of its repos. But growing take-up of the BoE's repo operations - where banks temporarily borrow money from the BoE - suggests the floor could be nearer than the BoE thinks. "They could slow things down or feel their way to that level," Schaffrik said, noting the BoE had never given a steer on its ideal position. "But everything indicates they want to go quite a bit below it."
Business Recorder
3 days ago
- Business
- Business Recorder
Sterling at four month low against euro
LONDON: The pound dropped to its weakest level against the euro in four months on Friday as a weekly decline in gilt yields on soft British data contrasted with higher European yields on expectations the European Central Bank is done with rate cuts. The euro reached as high as 87.27 pence, up 0.24% and approaching its April 11 peak of 87.38 pence, hit at the height of tariff-induced market turmoil. A break past that would take the euro to its highest since late 2023. The pound was also down 0.4% against the dollar at $1.3456. Data on Friday showed British retail sales for June were slightly below analysts' expectations, albeit rebounding from a sharp drop in May. They followed figures on Thursday showing UK business activity grew only weakly in July and employers cut jobs at the fastest pace in five months. The jobs data is the most important aspect of this, said Derek Halpenny, head of research global markets EMEA at MUFG, as rate setters at the Bank of England are most focused on the labour market. As a result, yields on British government bonds, or gilts, are set for small weekly falls across the curve, in contrast with European government bond yields, which are up sharply on signs of a US-EU trade deal and hints from the ECB that it is done with interest rate cuts. This 'notable divergence' is sending euro/sterling higher, said Halpenny. The BoE has hitherto been much more cautious about rate cuts than the ECB and most other European developed market central banks due to stubbornly high British inflation. The ECB has cut by 200 basis points since last year, in contrast to just 100 bps from the BoE. However, while ECB could now be done with easing, markets continue to anticipate two further 25 bps BoE cuts this year, and see around an 80% chance of the first of those at its early August meeting. Analysts say should UK inflation slow, the pace of cuts could accelerate. Though with inflation hitting its highest in a year in June, they say the BoE has a difficult balancing act.
Yahoo
5 days ago
- Business
- Yahoo
IMF wants Bank of England to ease interest rates 'gradually'
The International Monetary Fund (IMF) has urged the Bank of England (BoE) keep cutting interest rates, while warning chancellor Rachel Reeves that she faces 'significant challenges' in delivering her policy agenda without breaching her self-imposed fiscal rules. In the final version of its annual report on the UK economy, the Washington-based organisation said the BoE 'should continue to ease monetary policy gradually,' arguing that a 'gradual and flexible' approach remained appropriate. 'Given elevated uncertainty, they noted that retaining flexibility to adjust the monetary stance in either direction is warranted,' the IMF added. Interest rates are currently at 4.25% and it is widely expected that the Bank of England will cut them to 4% when it meets in 7 August. The IMF also cautioned that Reeves' fiscal strategy leaves limited room for manoeuvre, particularly in the face of potential shocks. Read more: FTSE 100 LIVE: Markets take breather following record setting-week 'In an uncertain global environment and with limited fiscal headroom, fiscal rules could easily be breached if growth disappoints or interest rate shocks materialise,' it said. 'The first best [option] would be to maintain more headroom under the rules, so that small changes in the outlook do not compromise assessments of rule compliance.' Reeves had £9.9bn of headroom against her main fiscal rule in March, but sluggish growth has since put her plans under strain, forcing a U-turn on proposed spending cuts. The IMF warned that pressures for 'overly-frequent changes to fiscal policy' could mount unless the chancellor creates more room to meet her targets. To improve fiscal policy stability, the IMF recommended 'further refinements' to the UK's budgetary framework. It said that the Office for Budget Responsibility (OBR) should conduct just one annual assessment of the government's fiscal rules, timed with the autumn budget, rather than two reviews per year. The IMF forecast that UK GDP would grow by 1.2% in 2025 and 1.4% in 2026, but warned that 'risks to growth are tilted to the downside'. It noted that tighter financial conditions and elevated household savings could hold back private consumption and slow the recovery. Read more: UK set to lose 16,500 millionaires this year as non-dom status ends 'In an environment of weak growth, persistent inflationary pressures may create 'stagflation' risks, complicating the monetary policy stance and putting pressure on public finances,' it said. 'A significant rise in commodity prices due to international conflicts could further aggravate the situation.' Responding to the report, Reeves insisted the IMF's findings backed her economic strategy. 'Today's IMF report confirms that the choices we've taken have ensured Britain's economic recovery is underway, and that our plans will tackle the deep-rooted economic challenges that we inherited in the face of global headwinds,' she said. 'Our fiscal rules allow us to confront those challenges by investing in Britain's renewal. We're committing billions of pounds into improving transport connections, providing record funding for affordable homes, as well as backing major projects like Sizewell C to drive economic growth. There's more to do, and that's why we're slashing unnecessary red tape and unblocking investment to let British businesses thrive and put more money in working people's pockets.'
Reuters
5 days ago
- Business
- Reuters
UK short-term inflation expectations rise, Citi and YouGov say
LONDON, July 25 (Reuters) - The British public's inflation expectations for the next 12 months rose in July and remained high over the longer term despite a slight dip from June, according to a survey published on Friday by bank Citi and opinion poll firm YouGov. Expectations for inflation over the coming year edged up to 4% from June's reading of 3.9%, the survey showed. Expectations for 5-10 years ahead fell to 4.2%, down from June's 4.3% but only back to a level they touched in May. Citi economist Callum McLaren-Stewart said the stubbornly high longer-term expectations were likely to add to concerns among some Bank of England interest rate-setters. "We infer little in the way of dovish signal from this month's Citi/YouGov survey and think this data series will continue to lean hawkish in the view of the MPC," McLaren-Stewart said. The BoE is widely expected to cut rates on August 7 as some Monetary Policy Committee members worry about a slowdown in the labour market. However, many analysts expect the BoE to continue with its gradual pace of cuts to borrowing costs due to inflation pressures lingering in Britain's economy. Official data published earlier this month showed British consumer price inflation rose to 3.6% in the 12 months to June from 3.4% in May - well above the BoE's 2% target.
Yahoo
5 days ago
- Business
- Yahoo
Sterling at four month low against euro as UK and euro zone rates diverge
LONDON (Reuters) -The pound dropped to its weakest level against the euro in four months on Friday as a weekly decline in gilt yields on soft British data contrasted with higher European yields on expectations the European Central Bank is done with rate cuts. The euro reached as high as 87.27 pence, up 0.24% and approaching its April 11 peak of 87.38 pence, hit at the height of tariff-induced market turmoil. A break past that would take the euro to its highest since late 2023. The pound was also down 0.4% against the dollar at $1.3456. Data on Friday showed British retail sales for June were slightly below analysts' expectations, albeit rebounding from a sharp drop in May. They followed figures on Thursday showing UK business activity grew only weakly in July and employers cut jobs at the fastest pace in five months. The jobs data is the most important aspect of this, said Derek Halpenny, head of research global markets EMEA at MUFG, as rate setters at the Bank of England are most focused on the labour market. As a result, yields on British government bonds, or gilts, are set for small weekly falls across the curve, in contrast with European government bond yields, which are up sharply on signs of a U.S.-EU trade deal and hints from the ECB that it is done with interest rate cuts. [GVD/EUR] [GB/] This "notable divergence" is sending euro/sterling higher, said Halpenny. The BoE has hitherto been much more cautious about rate cuts than the ECB and most other European developed market central banks due to stubbornly high British inflation. The ECB has cut by 200 basis points since last year, in contrast to just 100 bps from the BoE. However, while ECB could now be done with easing, markets continue to anticipate two further 25 bps BoE cuts this year, and see around an 80% chance of the first of those at its early August meeting. Analysts say should UK inflation slow, the pace of cuts could accelerate. Though with inflation hitting its highest in a year in June, they say the BoE has a difficult balancing act. Sign in to access your portfolio
