The Bank of England’s post-Brexit economic recovery plan got off to a stumbling start when it was unable to buy as many government bonds as it needed from major City investors.
Threadneedle Street will spell out on Wednesday how it plans to get reluctant investors to part with government bonds – also known as gilts – in order to provide additional stimulus to the economy under its new £60bn quantitative easing (QE) programme.
The Bank enacts its electronic money-printing exercise – which was launched in March 2009 and was one element of a stimulus package to kickstart the economy announced last Thursday – by buying gilts.
One of the other key measures – a quarter-point cut in interest rates to 0.25% – has also run into problems, with some high street banks unwilling to pass on fully cheaper borrowing costs to their customers.
The Bank offered on Tuesday to buy back £1.17bn of long-dated gilts – those with a maturity of 15 years or more – but received offers of only £1.11bn, leaving it with a shortfall of £52m. It is the first time since the Bank started buying back bonds that it has failed to attract enough sellers.
Jason Simpson, a UK rate strategist at French bank Société Générale, told Reuters: “It is a little surprising that this comes on the first week … it is quite early in the whole process, which will be a worry for the Bank of England.”
The unexpectedly low uptake of the buyback offer sparked a sharp reaction in the market, with yields on long-dated government bonds falling to record lows. Yields fall when the prices of bonds rise and push down the rate at which the government pays to borrow from major City investors.
Yields on 20-year gilts slumped to 1.2%, while those on 30-year bonds fell to 1.36%, in the anticipation that the Bank will hike the price it is prepared to pay investors to buy back the gilts.