Time for a pause in rate hikes and more QT?

by | Sep 18, 2023

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Laith Khalaf, financial analyst AJ Bell

Laith Khalaf, head of investment analysis at AJ Bell, comments on the upcoming Bank of England MPC meeting. The comment can be seen below:

“Markets are banking on another rate rise from the Bank of England, but its own tea leaves suggest the central bank should pause rate hikes for the time being. In its latest monetary policy report, the Bank of England forecasts that inflation would fall below the 2% target in the medium term, whether it keeps interest rates on hold, or follows market expectations by raising them and then trimming them back further down the line. Given the pain higher interest rates inflict on consumers and businesses, if the ultimate effect on inflation is the same, it makes sense to keep rates on hold rather than heap more pressure on a fragile economy.

“We’re now closing in on almost two years of consistent rate hikes, and the impact on the economy has been profound. Mortgage borrowing costs have soared, as have cash savings rates and wages. The effects of existing interest rate hikes are still rippling out through the economy, as it is reckoned to take between 12 and 18 months for monetary policy actions to have their full effect. 


“The Bank may still opt for another rate pump, and the market is indeed pricing in an 80% chance of rates rising again. Two members of the committee already showed their hands at the last meeting by voting for a base rate of 5.5%, and in the intervening period there has been little data to talk them down from that perch. Indeed record wage growth and an inflation reading that is widely expected to tick up again may well persuade other committee members to join them. As well as pushing up inflation, the recent climb in the price of oil may also cause some sweat to start accumulating on the prime minister’s brow, as we head towards the business end of his pledge to halve inflation by the end of the year.

“This week we should also get an update on the future of the Bank’s Quantitative Tightening (QT) programme, and it seems likely the Bank will opt to increase its sales of government bonds. Quantitative Tightening got off to a rocky start, and had to be postponed due to the ructions in the gilt market caused by last year’s mini-Budget. But overall the QT programme has been a success to date, in that it hasn’t caused a significant disturbance in bond markets. That said, the pace of bond sales has been slow, and the Bank’s gilt holdings are only around 7% smaller than they were a year ago. By selling off more bonds, the Bank can continue its progress towards more normal monetary policy and open up some room in its balance sheet to deal with future crises. 

“More gilt sales aren’t great news for the Treasury though. The Exchequer had it good when the Bank of England was hoovering up gilts, as this resulted in lower interest payments and a staggering £124 billion of borrowing costs being saved by the Treasury between 2009 and 2022. That gush of money has now gone into reverse and in the first six months of the Quantitative Tightening programme the Treasury had to hand over £15 billion to the Bank of England to cover interest payments and bond losses. 


“The ultimate net cash cost of the Quantitative Easing (QE) scheme to the Treasury is highly uncertain and will depend on Bank of England bond sales, base rate, and gilt prices. But the OBR reckons it could be around £63 billion by 2032. When taking into account the £124 billion surplus and the £15 billion already paid across, that suggests the Treasury would have to find somewhere in the region of £170 billion over the next decade to pay off the QE debt. Quantitative Easing was always about kicking the can of economic pain down the road, but the piper now finally needs to be paid against a backdrop of sky-high public debt and record levels of taxation. Given current electoral polling, this may well be a challenge to be met by an incoming Labour chancellor. It seems unlikely that another outgoing chief secretary to the Treasury would be naïve enough to leave a note to their successor saying there’s no money left, but if they did, it wouldn’t be wide of the mark.”

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