Bank of England faces tough trade-off between bond sales and inflation control

In a staff working paper, Professor Costas Milas and colleagues quantify the impact of the Bank of England’s quantitative tightening on the UK economy. Their model attributes a 0.4-point rise in yields to the Bank’s bond-selling programme, while also estimating a potential 1.4-point reduction in inflation. Because one outlet global bond shock already pushes yields higher, the Bank may consider slowing the £70 billion a year of government bond sales slated for the next twelve months.

Reducing sales would lower borrowing costs for the government but could delay inflation’s return to the 2 percent goal. The Monetary Policy Committee is set to announce its QT plan on 17 September, a decision that will test the balance between fiscal responsibility and monetary policy. The authors suggest the government may need to rethink its relationship with the central bank in light of these trade-offs.