THE EXTRA £50bn of quantitative easing (QE) widely expected to be announced tomorrow could be the last, according to analysts at RBC Capital Markets – removing the support the Bank of England has given the gilt market.
If next week’s inflation report shows inflation on track to hit its target in the medium term, it may indicate the end of QE as the Bank’s Monetary Policy Committee will no longer need to push down rates by buying bonds.
That would see the Bank stop its weekly purchases in May, allowing yields to move upward, RBC said.
“In each of the last four months the Bank bought around £8bn more gilts than the Debt Management Office supplied, and over the next three, assuming £50bn more QE is announced tomorrow, they will buy £5bn more each month,” said RBC Capital Market’s Sam Hill. “If QE ends in May, that balance will shift and the gilt market will grow by £12bn each month – a major change to the dynamic which may push up yields on 10-year bonds by 20 to 40 basis points.”
Factors including a worsening of the Eurozone crisis may throw this prediction off course, but it remains Hill’s central forecast.
Meanwhile Fathom Consulting will today urge the Bank to buy mortgage-backed assets “weighing down commercial banks’ balance sheets”.
