Despatches  

What will be the consequence of quantitative tightening?

Previously, as part of the QE programme, the BoE would also have bought the newly issued bonds, but under QT, they will not do this. This means the government will, over the next two years, have to sell more of the bonds it issues on the open market to private investors, this would be likely to have the effect of pushing the interest rate the government has to pay upwards.

The yield on UK government bonds actually rose by 0.07 per cent in the immediate aftermath of the rates announcement.

David Roberts, head of the Liontrust global fixed income team, says: “The BoE, as expected, raised base rates by 0.25 of a percentage point today. There were, though, several surprises, which conspired to move UK government bond yields higher than at any time since mid-2018. First, from March the bank has decided to start selling its stock of gilts, built up after years of QE.” 

This is because the BoE bought the bonds without haggling on the price; private buyers are more likely to haggle, particularly with inflation rising.

David Page, head of macro research at Axa Investment Managers, says the decision to allow government bonds to mature without reinvesting the capital will mean £28bn of bonds mature next month, with the central bank not buying the replacement stock.  

By buying corporate bonds, that is, bonds issued by companies, the BoE was helping to keep the cost of debt to companies lower as the economy exited recession, by selling some of its existing bonds back into the market. This is likely to reverse somewhat. 

James Sullivan, head of partnerships at Tyndall, says: “QT is basically central banks, the biggest buyer of bonds in the market, becoming the biggest seller of bonds in the market, and that has to have an impact.”

Bond yields move inversely to prices, and if bond yields are rising, this has an impact on the rest of the economy.

Market movements

Roberts notes that equities fell in the immediate aftermath of the QT announcement. This is because government bonds are viewed as the lowest risk asset class, so as the income available from there rises, it makes the income from many equities relatively less attractive, potentially impacting equity investors. 

In terms of its impact on the housing market, and on mortgages, higher bond yields mean banks can earn profits by simply buying bonds, and so may have less incentive to lend to homeowners or businesses, which are a higher risk way of earning an income, relative to government bonds, where the repayment is essentially guaranteed.