Shadow MPC: Hold interest rates, but increase bond sales.

According to the shadow monetary committee, Bank of England’s interest rate should remain unchanged at 5% this month. It also needs to accelerate its gilt sales.

The shadow MPC, which is responsible for deciding the interest rate on Thursday, voted unanimously to maintain the current base rate after the first rate reduction in four years was made in August. Sir Steve Robson (a former Permanent Secretary to the Treasury) was the only member of the nine members who said that rates should be cut to 4.75 percent.

Four members said that the Bank should also increase the pace at which it sells its bonds back to the financial markets. This process is known as ” Quantitative Tightening”, and shrinks the Bank’s balance sheet, which was accumulated during the financial crises and pandemic emergency when the Bank purchased billions of government securities.

This week’s rate decision is likely to be overshadowed by the quantitative tightening, which will determine the pace of balance sheet reduction in the coming 12 months. It could have significant implications for Labour’s first budget, on October 30. Accelerating the bond sales will increase short-term losses that the Bank accumulates, which is covered by cash transfers provided by Treasury.

According to shadow MPC members Charles Goodhart (left), Martin Weale (right), Bronwyn Curtis (center) and Andrew Sentance, the Bank currently allows its balance sheet shrinkage at a rate £100 billion per year. This should increase to £120 billion.

According to data from the New Economics Foundation, a £120 billion pace in the next year would lead to a loss of £28billion, limiting the fiscal headroom available for Rachel Reeves in her first budget.

As a result of the Bank of England’s losses, it has been speculated that Labour may adopt a different measure of the national debt to remove the impact of these losses when making monetary policy decisions. This could create an extra £20 billion of headroom in the autumn.

Kitty Ussher stated that the chancellor must “clarify” urgently which debt measures the government intends to use in its fiscal rules for the budget.

Senior officials of the Bank have stated that they wish to reduce the size, currently at around £750 billion, of the central banks balance sheet. This will allow them to lower their interest rate exposure, and to move towards a system in which the Bank has less excess reserves, ready to be tapped into by the banking sector.

Bronwyn Curtis is a shadow MPC member who believes the Bank should increase the pace of quantitative tightening above £120 billion. She said: “It’s a good start, but the Bank should consider doing more in the coming months without disrupting the markets.”

Analysts expect a small increase in the annual rate, from 2.2 to 2.3 percent. It is widely expected that the Bank will not make any changes to the borrowing costs. US Federal Reserve, on the other hand, is likely to ease monetary policy.

Karen Ward, chief strategist for JP Morgan Asset Management said that the UK “shouldn’t necessarily follow the Fed”, because “the UK economy doesn’t behave like the US”.

The US has experienced a remarkable expansion of the supply side, especially in the labour markets with an increase in migration and participation from within. The US has experienced a rapid deflation as a result. Ward stated that the UK labour market is suffering from low participation rates and stagnant wage growth.