The central bank's "balance sheet reduction" sounds like a huge and sudden move, but in reality, it is more like a long-term process with a clear timeline. On September 28th, Dave Ramsden, the Deputy Governor of the Bank of England, explained the latest arrangements: The Monetary Policy Committee has decided to gradually reduce its holdings of government bonds acquired as part of previous loose monetary policies over a multi-year period, with the goal of completing this policy-driven reduction by the end of 2034. Thereafter, the plan is to sell about 20 billion pounds worth of government bonds each year, while allowing some bonds to mature naturally on schedule. To summarize this as "the Bank of England plans to sell all its government bonds at once" is not only exaggerated but can also mislead readers' understanding of the bond market and interest rates.

This speech serves as a further clarification of the interest rate decision made in September and the accompanying arrangements, and it is not an additional policy meeting held suddenly on September 28th. The benchmark provided by Ramsden is that the asset purchase tool APF was holding approximately 488 billion pounds of government bonds at that time. Of these, about 222 billion pounds of bonds will mature before 2035 and will not be sold again; around 120 billion pounds of longer-term government bonds will continue to remain in APF and will be specifically used to support the issuance of paper money, rather than being considered part of the monetary policy holdings; the remaining approximately 146 billion pounds are planned to be sold. These three amounts together constitute the total stock. It is not appropriate to equate "retaining 120 billion pounds" with "the policy of balance sheet reduction not being completed."

Why change from an annual discussion to a multi-year arrangement?

The Bank of England began to taper quantitative easing in 2022, and the APF scale decreased from a peak of approximately 895 billion pounds to about 488 billion pounds. The process included the natural maturity of about 259 billion pounds in government bonds, the sale of about 129 billion pounds in government bonds, as well as the sale or maturity of about 20 billion pounds in corporate bonds. Previously, the committee determined the scale of balance sheet reduction year by year, and the market had to wait each year for a new decision on the pace. This approach provides flexibility, but it also leaves uncertainty about future supply to government bond traders.

The new multi-year plan aims to make the path more predictable. Ramsden stated that for the approximately £368 billion in policy bonds that need to be sold, the committee has agreed on an average annual reduction of about £46 billion by 2034, with about £20 billion sold each year, and the remainder relying on bond maturities. It is not a case of forcing auctions for the same total amount every year, as the natural maturity volume varies from year to year; what is fixed is the planned sales volume. As a result, the market can incorporate supply expectations into pricing earlier, and the central bank can continue to use bank interest rates as a main tool for adjusting monetary policy stance.

British government bonds have relatively long maturities, which is one of the reasons why the central bank cannot simply wait for them to mature. Ramsden estimates that if reliance is placed solely on the natural maturity of bonds, the exit process could exceed 50 years. Keeping large interest rate risks on the central bank's balance sheet for such a long time would limit its ability to respond to future shocks. However, actively selling bonds could also affect the secondary market, so the Bank of England emphasizes that sales should be gradual and predictable, and must not disrupt the market. Since the launch of the sale plan, the central bank has stated that the average subscription coverage for its bond auctions has been around 2.3 times, indicating that sufficient bids were attracted during previous phases of implementation; this does not mean that there will not be pressure in future auctions.

Which parts have been decided, and which ones are still subject to conditions?

What needs to be clearly distinguished is the 'exit path decided by the committee' and the 'way of selling considered by the executive department.' Ramsden indicates that the executive branch of the Bank of England is considering selling the remaining approximately 146 billion pounds of government bonds to the government, rather than continuing to sell them directly to the market. However, this method of implementation still requires final agreement with the Ministry of Finance. It is not a transaction that has already been fully completed, nor does it mean that the policy assets have disappeared from the books. For bond investors, the seller and the timing of the sale will affect the supply path in the market; for the general public, it does not mean that their bank deposits will be withdrawn on the same day.

The committee still retains the threshold to reconsider the pace of balance sheet reduction in extreme circumstances: if changes in bank interest rates alone are not sufficient to achieve inflation targets, or if financial markets are judged to be in severe disarray, the approach may need to be adjusted. Beyond that, the fixed plan is designed to reduce the uncertainty associated with frequent reevaluations. Balance sheet reduction and interest rate hikes cannot be mechanically equated: central banks can employ different combinations of interest rate policy and balance sheet policy, and the economic impact depends on factors such as bond yields, market liquidity, and the reserves of the banking system.

The market also needs to distinguish between 'the central bank selling to the government' and 'the cancellation of government bonds.' Even if the implementation method is ultimately adjusted according to the discussed plan, the debt and related cash flows will not disappear out of thin air just because the holders change. It may change the timing and quantity of government bonds directly absorbed by the open market, but the relationship between the fiscal and central bank balance sheets and market liquidity still requires a detailed reading of the official agreement. Ramsden The speech provided a outline of the policy, but the specific implementation details cannot be filled in by outsiders on their own. Therefore, when bond investors make term allocations, they should track the annual auction arrangements and the Ministry of Finance's debt issuance plan, rather than just remembering the year 2034 as the end point.

The significance of this arrangement does not lie in dumping a huge amount of government debt into the market on that day, but rather in making the exit strategy for the next eight years clearer. The Bank of England once used quantitative easing to deal with the crisis, and now it is attempting to ensure that the exit process also has a predictable end. 2034 is set as the target date for completing the policy-based holdings withdrawal, but this is not an unconditional guarantee for the future economic and market conditions. What needs to be observed next is how the annual bond sales plan will be implemented, when the implementation agreement with the government will be finalized, and whether the market will still be able to smoothly absorb the supply.

For ordinary readers assessing this news, the three most useful figures are: a current stock of 488 billion pounds, approximately 368 billion pounds of policy-related government bonds that need to be sold, and a planned annual sale of 20 billion pounds. It is important to keep these figures clear in mind to avoid mistaking assets that are intended to support paper currency for part of a policy of monetary easing, or to mistakenly consider multi-year arrangements as a one-time tightening measure. The central bank has released a roadmap to reduce sudden speculation in the market; however, whether this roadmap will achieve its goals will still have to be tested by the actual auctions and the performance of the financial markets in the coming years.

Cover material: Official portrait from the Bank of England's official website Dave Ramsden; the image has been edited and cropped. This person is the speaker for this event; the picture does not depict the actual speech scene.