OUR Bank of England began yesterday and became the first major central bank to actively reverse the quantitative easing policies that central banks have adopted to support their economies amid the global financial crisis and more recently the pandemic downturn. Starting from yesterday’s first bond auction of £750m, which equates to €871.5m, the Bank of England is thus starting to phase out the £838bn, or around €974bn, of bonds held in the portfolio. her. This huge volume of securities has been gradually accumulating over 13 years, that is, as long as the period of quantitative easing in Britain has so far lasted. It should be noted that the Bank of England was still buying British government bonds a few days ago to stop the hype caused in the markets by Liz Truss’ “mini-budget”.

It will be a dress rehearsal of sorts, the first test of a move away from quantitative easing, a turnaround that two others of the world’s three largest central banks are also planning: ECB who collected in his portfolio securities with a total value of 5.1 trillion. euros, but also the US Federal Reserve System with securities worth 9 trillion. dollars. For Bank of England Governor Andrew Bailey, the reduction in his portfolio is part of the bank’s overall preparations for dealing with another possible crisis. Quantitative easing policies have somehow kept market interest rates in check, but Bailey hopes that its repeal, “quantitative tightening” as it’s often called, can run quietly in the background without triggering turmoil in the bond markets, so the focus monetary policy attention should remain fluctuations in the base lending rate. However, economic analysts and market participants are skeptical, since quantitative easing has been going on for many years, and it is difficult to assess how economies and markets will react to its cancellation. As Paul Hollingsworth, European affairs economist at BNP Paribas, points out, “transitioning to restrictive monetary policy by raising interest rates is a known and proven method”, while, conversely, “in quantitative tightening, central banks enter uncharted waters.” and the risk of unwanted side effects is clearly higher.”

After all, the Bank of England’s decision to start selling bonds comes at a critical time for both the bank and the Treasury as they prioritize curbing inflation, which is at its highest level in 40 years. Meanwhile, investors will have to absorb record debt issued by the British government to finance the country’s skyrocketing budget deficit. According to current data, the deficit for the 2022-2023 fiscal year could reach £170bn or €197bn, nearly double the Budget Office’s March forecast. With yesterday’s first bond auction, the Bank of England is taking a big step back to pre-crisis 2008/09 global financial crisis status, although Andrew Bailey stressed that the bank’s balance sheet will not return to pre-crisis levels. financial crisis.

This is a kind of dress rehearsal for the cancellation of the quantitative easing policy, which is planned by both the Fed and the ECB.

The move, however, is a sign that the bank believes the markets could gobble up more bonds, although Andrew Bailey stressed that bond purchases could be stopped at any time if some turmoil dictated. The BoE decision had already been delayed by 4 weeks as it was originally scheduled for October 3rd, but was delayed due to the turmoil caused by Liz Truss’ “mini budget” in the markets. In addition, the bank sells bonds at prices lower than those at which it bought them, and thus is forced to record losses on its balance sheet.

As for the other two major central banks, the closest they come is the Fed, which has allowed $95 billion worth of bonds to expire since September without replacing them. After all, there is an ongoing internal debate within the ECB about whether to continue selling bonds or follow the US Fed’s tactics and simply let the bonds redeem without replacing them.