LONDON – Britain’s government should take on hundreds of billions of pounds of hard-to-sell bonds held by the Bank of England to reduce the risk of the BoE’s independence being questioned when the time comes to raise interest rates, a think-tank said.
The BoE is nearing the completion of its 875 billion-pound ($1.21 trillion) programme of British government bond purchases, the centrepiece of its COVID-19 stimulus programme.
With borrowing costs at rock-bottom lows, the BoE makes profits from its gilt portfolio which flow back to the government.
But those profits will turn to losses when borrowing costs rise, something Britain’s Treasury has promised to make good to the BoE.
“One can imagine accusations about the central bank being bailed out by the government and accompanying damage to central bank credibility,” the National Institute of Economic and Social Research said in a report published on Thursday.
The Treasury could give easy-to-sell short-term bills and gilts to the BoE in return for all or some of the less liquid longer-dated government bonds which NIESR said the central bank might struggle to sell in large volumes without pushing up borrowing costs in markets and weakening its control of the economy.
“We believe that, once we enter the exit phase, these sales would be better managed by the Treasury,” NIESR said.
“The transaction would be wholly within the public sector, so that the consolidated balance sheet position of the public sector vis-à-vis the outside world would not change.”
As Britain’s economy recovers from its 10% slump in 2020, two BoE monetary policymakers have said the time is nearing to consider tightening monetary policy but most of their peers favour keeping their stimulus programme in place for now.
Investors expect the BoE to scale back its stimulus from next year.
The BoE’s options for weaning the economy off its support include allowing its stockpile of gilts to diminish by not reinvesting maturing bonds, or selling off some of the debt.
A first increase in interest rates – the other big policy tool for the central bank – is expected in about a year’s time.
NIESR said its plan would disentangle monetary and fiscal policy after the BoE, like other central banks, ramped up its bond-buying last year as the government borrowed more to pay for a surge in pandemic spending.
($1 = 0.7210 pounds)