While this is the same pace of reduction as this year, only £13bn of these bonds will be actively sold by the Bank as opposed to being allowed to mature naturally. This compares with roughly £50bn of active sales the previous year. This change to the mix of sales has a significant impact on public finances as it spreads losses from the scheme over a longer period.
The effect will be to increase the Chancellor’s headroom by up to £10bn before the Budget, reducing the need for large tax hikes and spending cuts. The Office for Budget Responsibility (OBR), the Government’s tax and spending watchdog, has based its forecasts on the assumption that the Bank’s mix of bond sales would be roughly the same as last year, which would entail significant transfers from the Treasury to the Bank of England.
In June, Goldman said “an additional £10bn of fiscal space” could be freed up against the current target to get debt falling in the fifth year “if the OBR extrapolates forward the slower pace of sales”.
Sanjay Raja, chief UK economist at Deutsche Bank, also said the Bank’s decision could save up to £10bn but added that the ultimate total would “come down to the choice of fiscal rules as well as the OBR’s assumptions around medium-term QT”.
Changes to the target itself could also increase Ms Reeves’s headroom to £25bn, based on previous market pricing.
Michael Saunders, a former Bank rate-setter, said changing the debt rule to include the Bank of England would be a “totally sensible change”. While including the Bank would inflate the national debt, Covid-era loans made to businesses that are currently being repaid would help drive a faster reduction of the total over the next five years.
Mr Saunders said: “It would create more headroom. I don’t think she should use that headroom to do extra borrowing, but use it to have more headroom against her fiscal rules.”
Governor Andrew Bailey said he was “very relaxed” about any change in tax and spending rules adding: “It doesn’t really affect at all what we do… and so it’s an important decision for [the Chancellor].”
A Treasury spokesman said: “Decisions regarding quantitative easing and tightening are rightly for the independent Bank of England’s Monetary Policy Committee.
“The overall gains or losses from the Asset Purchase Facility are highly uncertain and predominantly determined by interest rates and gilt prices. The OBR will make a full assessment at the October Budget.”
The Bank’s bond decision came as officials voted to keep interest rates on hold at 5pc on Thursday. Mr Bailey said he was “optimistic” that borrowing costs “will come down further” this year as inflation continues to cool.