BOE Says It's Unlikely to Sell QE Gilts Before Rate at 2%

  • Policy makers keep benchmark rate at record-low 0.5%
  • Potential gilt sales should feed into valuation: RBS

The Bank of England won’t start selling bonds acquired during its quantitative-easing program until its benchmark interest rate reaches 2 percent, the central bank said in its Inflation Report released Thursday.

The Monetary Policy Committee expects to keep the stock of purchased assets at its current level of 375 billion pounds ($573 billion) until the key rate “has reached a level from which it can be cut materially,” the central bank said. A final decision will “reflect the economic circumstances at the time.” Gilts rose on Thursday as the central bank said it would reinvest proceeds from 6.3 billion pounds of securities that are due Dec. 7.

“There was no explicit reference in the past to a level,” said Simon Peck, a rates strategist at Royal Bank of Scotland Group Plc in London. “If the BOE is telling you that we are going to have a program of explicit gilt sales as part of the policy-normalization process, it’s a rationale for higher gilt term premia,” he said, referring to the extra yield typically demanded for holding bonds longer.

“If you are thinking about the fair value of a 10-year bond for instance, this should be something that feeds into your valuation thought-process.”

Policy makers in London kept the key rate at a record-low 0.5 percent, where it’s been since 2009, with the majority of the MPC saying underlying price pressures “were not strong enough to justify” tightening. Forward contracts based on the sterling overnight index average suggest that a full quarter-point increase to the 0.5 percent key rate won’t come until after December 2016.

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