Observers will watch with nervousness the BoE meeting on Thursday, as aside from its latest decision on interest rates, the central bank may also unveil details on when and how it could start tightening its current stimulus measures, many of which have said. in place since the 2008 global financial crisis.
A BoE review on a possible tightening has been in preparation since February and will be published before the end of the year. The bank said the review would include a strategy on how to organize a hike in interest rates, which are currently at an all-time high of 0.1%, as well as a timeline on how it plans to hike. sell government bonds purchased under its quantitative program. easing program (QE), which runs into the hundreds of billions.
The main focus for investors when the review is finally published will be the threshold at which the BoE starts selling bonds in the market, reversing its current buying policy.
This event depends on the BoE’s discount rate threshold, the interest rate that a central bank charges domestic banks to borrow money from. Currently, the BoE’s policy is not to sell bonds until the discount rate has reached 1.5%.
However, a Reuters report said options for the BoE in its review could include lowering its threshold to a conservative level of between 0.5% and 0.75% to start selling bonds. earlier.
More drastic predictions included the BoE reducing the threshold to 0.25%, which would allow it to reverse QE in late 2022, or even remove the threshold altogether, which would allow the BoE to start selling bonds at the end of 2022. early next year, potentially before raising interest rates.
However, while removing the threshold may prove popular with policymakers, some analysts may fear that such a move could derail the economic recovery by raising borrowing costs.
Another potential strategy would involve the BoE not buying new bonds rather than selling its current holdings, although varying maturity dates on the bonds purchased could result in an uneven rate of policy tightening as different amounts of money bonds mature in different years.
End of support raises fears of a cliff-edge
The potential unwinding of the BoE’s quantitative easing program, as well as possible interest rate hikes, could raise market concerns about a possible economic crisis in the third quarter, as measures to support the economy pandemic are beginning to end in many countries.
The end of the UK holiday scheme, along with the gradual decline in corporate rate relief and stamp duty holidays over the coming months could raise some observers fears that problems with unemployment and firms in difficulty do not break out simultaneously once the support measures have been removed.
READ: Edge of the post-COVID cliff: end of support measures raises fears of rocky third quarter
Interest rate hikes in particular are a cause for concern given the ongoing debate over whether rates should be raised to reduce the possibility of runaway inflation.
However, a rate hike would likely increase the cost of servicing the already large debt that swirls around the UK economy, especially among small businesses, although the Treasury may want to keep inflation under control as some liabilities, including the triple state pension foreclosure, are likely to see billions in additional spending added because of their link to inflation rates.
The problem was highlighted by the latest government borrowing figures, which saw a record rise in state interest payments to £ 8.7bn in June due to inflationary pressures.
The BoE’s decision can therefore turn into arbitrage, increase the pressure on corporate debt service by raising rates or tighten the government’s screws by keeping rates low and risk keeping inflation high.