BoE may reverse 100 billion pounds of QE over a year, Bailey says

By David Milliken

LONDON (Reuters) -Bank of England Governor Andrew Bailey said the central bank was considering reducing its British government bond holdings by 50 billion to 100 billion pounds ($60 billion-120 billion) in the space of a year through a mix of active sales and gilt redemptions.

The BoE is due to become the first major central to start selling government bonds that it has bought over more than a decade as part of its attempts to stimulate Britain's economy.

It stopped reinvesting the proceeds of maturing gilts from its 875 billion-pound quantitative easing (QE) stockpile in February, since when its holdings have fallen to 847 billion pounds. The total will drop to 838 billion pounds in September, then another 35 billion pounds of gilts are due to mature next year.

The BoE had previously said it would detail its options for active gilt sales after its August meeting. Bailey's remarks in a speech to be delivered to bankers later on Tuesday are the first time he has put a number on the potential scale.

"We are currently looking at a total reduction in the stock of gilts ... which covers both sales and gilt redemptions, of something in the region of 50-100 billion pounds in the first year," Bailey said in the text of a speech he is due to give at the City of London's annual Mansion House dinner.

Outright sales could begin soon after a confirmatory vote at the Monetary Policy Committee's September meeting, he added.

Bailey repeated that a half-point increase in the BoE's Bank Rate - which would be the first since it gained operational independence in 1997 - was also an option for August's policy announcement, but stressed that no decision had been made.

"A 50 basis point increase will be among the choices on the table when we next meet. 50 basis points is not locked in, and anyone who predicts that is doing so based on their own view," Bailey said, adding that the economy was already slowing.

Financial markets price in a 94% chance that the BoE will raise Bank Rate to 1.75% from 1.25%.

The BoE's government bond holdings have a much longer average maturity than similar purchases made by the U.S. Federal Reserve.

This makes an active sales programme necessary for the bank to reverse a significant proportion of the 450 billion pounds of bond purchases it made between March 2020 and December 2021 to offset the impact of the COVID-19 pandemic on the economy.

The BoE does not expect the sales to put much upward pressure on British government bond yields. Interest rates will remain its main tool to control inflation, which hit a 40-year high of 9.1% in May.

Bailey said the 50 billion -100 billion pound reduction in gilt holdings was in line with financial markets' expectations.

($1 = 0.8310 pounds)

(Reporting by David Milliken Editing by William Schomberg and Angus MacSwan)