Bank of England ‘kicking can down the road’ on QE Purchase Shortfall

By David Milliken

LONDON – The Bank of England announced on Wednesday that it would postpone addressing a £52 million ($68 million) shortfall in its newly initiated bond purchase program by three to six months, following an unsuccessful buy-back attempt on Tuesday due to insufficient willing sellers.

The central bank reinstated its quantitative easing initiative last week after nearly four years, aiming to mitigate the impact of Britain’s exit from the European Union. The goal is to acquire £60 billion of government debt over a span of six months.

However, on Tuesday, during its first effort to purchase bonds with maturities exceeding 15 years—a segment highly sought after by British insurers and pension funds—the bank fell short of its target of £1.17 billion.

The Bank of England clarified on Wednesday that it would not immediately address the shortfall, but would instead incorporate it into the latter half of the six-month program, with more details to be revealed on November 3.

Darren Bustin, head of derivatives at Royal London Asset Management, commented that the announcement reflects a delay in action and has created a "wait and see" atmosphere for investors evaluating the reasons behind the shortcoming.

Following the Bank’s announcement, government bond prices soared, leading to record-low yields. Some short-dated non-benchmark gilts from 2019 and 2020 fell into negative yield territory, although this is not unprecedented. In contrast, benchmark UK bond yields have not yet dipped below zero, unlike those in Japan and Germany.

Thirty-year gilts experienced the most significant gains on Wednesday, with yields declining by over 8 basis points to a record low of 1.294 percent, halving their yield from less than a year ago. Two-year benchmark yields dropped by a basis point to 0.09 percent. The Bank of England is widely anticipated to reduce the Bank Rate to 0.1 percent in November from last week’s all-time low of 0.25 percent, although further rate cuts below zero have been ruled out.

The Bank encountered a surge of sellers at its first reverse auction for short-dated debt on Monday and plans to purchase £1.17 billion of 7-15 year bonds later that day.

Bustin indicated that the Bank might find it easier to procure long-dated debt after the UK Debt Management Office issues £1.25 billion of 40-year gilts next week, though the risk of further unsuccessful auctions remains.

"If this trend continues and monetary policy is unable to meet its objectives, then the responsibility may need to shift to the Treasury to identify a solution," he stated.

Finance minister Philip Hammond has mentioned that he will assess government tax and spending policies in an upcoming budget update later this year. Some economists are advocating for a program of debt-financed investment projects to bolster the economy.