BoE sets rules to counter weak demand in future bond sales – Reuters

Pedestrians walk past the Bank of England, in London, Britain August 8, 2022. REUTERS/Toby Melville

LONDON, Sept 1 (Reuters) – The Bank of England set out new rules on Thursday for its next bond-selling program, intended to total 10 billion pounds ($11.6 billion) per quarter, giving it allow very low bids to be rejected or short-term auctions to be cancelled.

The UK bond market has seen heightened volatility over the past month as prices fell in the face of soaring inflation.

But the BoE said there would be a “high bar” for pausing the sell-off program, which is still subject to final approval by its monetary policy committee.

The BoE is poised to become the first major central bank to actively resell in financial markets some of the government bonds it bought as part of stimulus efforts dating back to the global financial crisis.

It is also raising interest rates to try to prevent jumping inflation from becoming a long-term problem for the economy.

The BoE has confirmed that it will set minimum prices for bonds up for sale in its auctions – which it contemplated in its initial August 4 announcement – and reserves the right to cancel the auction entirely at any time before publish the results.

“This backstop will be set at such a level that it should not bind regularly, but would allow the Bank to respond to evidence of particularly weak demand in the auction by reducing the amount it provides” , the BoE said.

The BoE will hold three auctions every two weeks, selling gilts in maturity baskets of 3-7 years, 7-20 years and over 20 years. The process is similar to the reverse auctions the BoE held until December 2021.

The BoE bought a total of £875bn of gilts in a series of buying programs that started in March 2009.

Active selling will accelerate the reduction in the BoE’s bond stock, which now stands at 844 billion pounds after the central bank stopped reinvesting proceeds from maturing gilts in February.

The BoE expects the combination of active selling and maturing gilts to reduce its holdings by 80 billion pounds over the next 12 months.

Auctions will begin in late September, subject to confirmation in the MPC’s policy announcement on September 15.

Alongside the gilt auctions, the BoE will hold a new weekly short-term repo lasting 7 days. As a result, the BoE said it would increase the minimum spread for prime collateral at its long-term indexed Repo to 3 basis points from zero.

($1 = 0.8650 pounds)

Reporting by David Milliken; edited by William James, Kirsten Donovan

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