Bank of England governor risks leaving £375b puzzle for successor
Mark Carney risks leaving his successor a £375 billion (HK$4.87 trillion) conundrum: what to do with the government bonds the Bank of England amassed during its stimulus plan.
Bank officials say unwinding quantitative easing is unlikely to begin until the key interest rate has risen materially from its record low 0.5 per cent because they want the option of cutting borrowing costs again if the recovery falters. Derivatives contracts suggest that point may come after Carney leaves in 2018.
"They are well advised to leave it on the back-burner for the foreseeable future," said John Wraith, a fixed-income strategist at Bank of America. "The impact of actively selling gilts is unknowable. Assuming Carney sticks to his intention to leave after one term, it's highly likely that decision won't happen while he's governor."
The asset purchases that began in 2009 to kick-start the economy have left the bank holding more than a quarter of the value of gilts outstanding. Its commitment to maintain the programme has helped gilts return about 4 per cent this year and reduced the 10-year yield to below 2.6 per cent from 3 per cent.
"To be able to use bank rate as an active tool in response to adverse shocks to activity, the MPC is likely to defer sales of assets at least until bank rate has reached a level from which it could be cut materially, were more stimulus to be required," the Monetary Policy Committee said in its quarterly inflation report this month. The report assumed the stock of purchased assets will remain unchanged for three years.
Carney, who took over the BOE from Mervyn King in July last year, has said he plans to serve one five-year term.
Investors are betting the benchmark rate, which has been at a record low for more than five years, will rise 25 basis points by next May, according to Sonia contracts. They show the rate reaching 1 per cent three months later and 2 per cent in early 2017. The implied yield on short-sterling contracts expiring in June 2018, which allow investors to bet on the interbank lending rate, is at 2.87 per cent.
The bank needs to start increasing its benchmark "sooner" rather than later if it wants to keep the pace gradual, MPC member Martin Weale said in an interview with the
Financial Times. "We can wait a bit longer. How long that 'bit longer' will be, I'm not sure," Weale said. It's "not so urgent it needs doing now", he said.
"It will probably take at least 2½ years before they start reducing their assets, and we are more likely looking beyond that," said Richard Kelly, a senior fixed-income strategist at Toronto-Dominion Bank. "It may take them a while to go back to a more normal policy, which could very well coincide with the end of Carney's tenure."