How the Bank of England could start to reverse its huge stimulus

The Bank of England could this week shed light on how - and when - it might throw its decade-long stimulus programme into reverse, even as it continues for now to buy bonds as part of its 895-billion-pound quantitative easing programme.

The BoE has been working since February on how to start tightening policy. It is expected to be among the first of the world’s main central banks to begin the process of weaning its economy off stimulus support.

The BoE has said its review of how to coordinate or sequence a rise in interest rates and sales from its government bond stockpile will not signal an imminent change of policy. Instead, it wants to guide the public and markets about its future plans.

The BoE’s benchmark Bank Rate is at a record-low of 0.1% and its bond purchases, which began in 2009 during the global financial crisis, are approaching 40% of gross domestic product, double the share before the pandemic.

When is the review due?

The BoE says it will publish the review before the end of 2021. Many economists expect it to come alongside its latest policy announcement and forecasts on Thursday. BoE policymaker Gertjan Vlieghe said on July 26 the review would come “soon”.

What is the boe’s current policy?

The current guidance, dating back to June 2018, states that the BoE will not start to unwind QE, and will reinvest the proceeds of maturing gilts, until Bank Rate is near 1.5 per cent.

The existing guidance makes it unlikely the BoE would start to unwind QE before the next downturn, and over time its holdings could account for an ever-greater share of the bond market.

Rates have fallen globally since 2018 and five-year gilt yields are hovering around 0.3 per cent - much lower than about 1.2 per cent when the guidance was issued - suggesting that markets do not expect BoE rates to reach 1.5 per cent any time soon.

Governor Andrew Bailey has described the guidance as “too prescriptive.” He wants to ensure the BoE has enough headroom - in the form of bonds available to buy from investors - to tackle future crises. Some lawmakers say the scale of QE distorts financial markets and creates a perception that the BoE funds government spending, jeopardising its credibility.