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The Bank of England (BOE) is attempting to remove bonds from its balance sheet, and to do that, they are sending ripples through the money markets.
Analysts have warned the central bank of England that it will soon need to stop its weekly sales of bonds by the end of this year. If they do not stop the continuous sale, future efforts to loosen the borrowing conditions will be at risk.
BOE is expected to share further guidance on the quantitative tightening after the latest meeting. The BOE is getting rid of the debt it bought during the pandemic and with this sale of bonds, the bank is absorbing excess cash from the market in the process.
<h2 class="wp-block-heading" id="strong-why-the-boe-is-aggressively-getting-rid-of-bonds-strong">Why The BOE Is Aggressively Getting Rid Of Bonds</h2>
The bank’s rate is supposed to attract overnight deposits to the highest relative to the BOE’s key rate since 2021, as per the data presented in a Bloomberg show. The show also said that the European Central Bank and Federal Reserve are at odds with the Bank of England and thus they are avoiding direct sales of the bonds for now.
Derek Halpenny, a researcher at MUFG, said in one of his podcasts that “financial conditions are tightening and liquidity conditions have the potential to create increased short-term rate volatility.” and “The shortage of cash and the potential upward pressure on rates would certainly be inconsistent with the MPC cutting rates.”
However, the actions of BOE are not concerning citizens in general, as BOE has provided prime facilities and is ready to provide cash to banks in need as the economy is focusing on the smooth functioning of the market.
<h2 class="wp-block-heading" id="strong-impact-on-economy-strong">Impact On Economy</h2>
The increase in the <a href="https://www.thecoinrepublic.com/2024/04/11/us-money-market-funds-managers-gear-up-for-new-sec-rules/" target="_blank" rel="noopener noreferrer nofollow">money market</a> rate can impact financial contracts that are worth trillions of pounds. This could hinder the BOE’s efforts when it seeks to loosen economic policies.
The UK policymakers will revisit their bond-selling policy in September this year. Some of the factors that might change before the policy maker makes the change include:
<h3 class="wp-block-heading" id="strong-reduction-in-liquidity-strong">Reduction in Liquidity</h3>
The Bank of England’s quantitative tightening and the early repayment of pandemic era bank loans have been reduced gradually. Thus, the spare money in the economy is the lowest since 2021.
<h3 class="wp-block-heading" id="strong-tightening-of-trading-spread-strong">Tightening Of Trading Spread</h3>
The sterling benchmark for unsecured lending, SONIA, has been increasing. It is tightening the spread between SONIA and BOE’s key rates. SONIA stands for sterling overnight indexed average and is an overnight rate, based on actual transactions in overnight indexed swaps for unsecured transactions in the markets supporting pound sterling. For the first time since 2021, it has fallen below 5 bps.&nbsp;
The recent moves are not substantial; however, in the long run, liquidity conditions can deteriorate. The BOE weekly funding facility was initially introduced to support banks that are in search of liquidity for day-to-day transactions.

BOE’s Sale Of Bonds Impacting Money Markets Of The Country

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Thecoinrepublic.com

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