Between 28 September and 14 October 2022 the Bank of England, in line with its financial stability objective, conducted temporary and targeted purchases of index-linked and long-dated conventional UK government bonds (gilts). The objective of those purchases was to restore orderly market conditions following dysfunction in the UK gilt market, and in doing so reduce risks from contagion to credit conditions for UK households and businesses.
In total, the Bank’s holdings of gilts purchased in these operations amount to £19.3bn, of which £12.1bn are long-dated conventional gilts and £7.2bn are index-linked gilts (these figures are in proceeds terms.).
Consistent with the objectives of the purchases announced on 28 September, the Bank is now setting out how it intends to unwind this portfolio in a way that is timely but orderly.
Unwind must be timely to ensure the Bank delivers on its commitment that the purchases would be temporary in nature. Based on ongoing market monitoring and intelligence, the Bank judges that it is appropriate to begin the unwind before the end of the year. To deliver a timely exit, the Bank therefore intends to make gilts in the portfolio available to interested buyers from 29 November.
At the same time, unwind must be done in a way that is orderly to ensure it does not trigger renewed dysfunction. With this in mind, the Bank’s sales will commence not at a fixed pace, but will be designed in a demand-led way that is responsive to prevailing market conditions.
Once the unwind process begins the Bank will allow eligible counterparties to express interest in purchasing any of the index-linked and/or long-dated conventional gilts held in the portfolio via a form of reverse enquiry window.
Acceptance of any bids to buy gilts will be at the Bank’s discretion, based on its assessment of the pattern of demand. As a general principle only bids that are deemed attractive relative to prevailing market levels will be accepted.
This means that there will be instances when the Bank could sell a larger volume of bonds if demand is particularly strong; but also times when the Bank will sell few or no bonds if there is insufficient demand. This demand-led approach is intended to allow us to meet demand where it exists while limiting the impact of sales on market conditions.
A Market Notice will be published in the week commencing 21 November that will set out operational details of the Bank’s planned approach, including how and when the reverse enquiry window will be made available. Gilt-edged Market Makers will also be invited to a call next week to discuss operational implications and initial feedback. To ensure transparency, minutes of that call will be published on the Bank’s website.
The Financial Policy Committee has welcomed the Bank’s plans to unwind its temporary holdings of UK government debt in a timely but orderly fashion.
The Monetary Policy Committee (MPC) has been informed of these plans, in line with the Concordat governing MPC’s engagement with the Bank’s Executive regarding balance sheet operations. As noted in the MPC’s November 2022 Minutes, the MPC has judged that these financial stability operations by the Bank would not affect the MPC’s ability to conduct monetary policy, including its earlier decision to sell UK government bonds.