Bank of England Governor Andrew Bailey said the risk premium on UK assets since September is “pretty much gone” but that confidence remains fragile.
(Bloomberg) — Bank of England Governor Andrew Bailey said the risk premium on UK assets since September is “pretty much gone” but that confidence remains fragile.
Investors dumped UK assets including the pound and government bonds after then-Prime Minister Liz Truss’s disastrous budget program set out a series of unfunded tax cuts. Those were mostly reversed after Truss stepped down and Rishi Sunak took over as premier.
“It’s going to take some time too convince people that we’re back to normal,” Bailey told the Treasury Committee in the Parliament on Monday. “International partners will understand that we’re back to where we were, things have restored to normal.”
He added that mortgage rates in markets have drifted down as a result of that risk premium dissipating. But he noted that the BOE managed to sell more than £19 billion ($23.2 billion) in bonds it bought during an emergency program to stabilize markets through the crisis triggered by the Truss budget.
“We’ve just sold £19 billion into the market, and we haven’t caused a disturbance in the market in doing so, Bailey told the Treasury Committee. “It hasn’t moved markets.”
Bailey confirmed the BOE made a profit of about £3.8 billion from emergency bond purchases it made last year and finished selling off on Jan. 12.
“The relevant cash flows associated with the portfolio, including profits realised on the sales, have been incorporated into the usual quarterly cash transfer process between the APF and HM Treasury,” Bailey wrote in a letter to the UK Treasury released Monday.
The profit will be offset against losses stemming from the sales of bonds purchased under the standard QE plan. The Treasury last year cleared an £11 billion transfer to the BOE to cover potential losses in the current fiscal year.
The BOE also said the Treasury can now cut the maximum size of the APF to £851 billion, which includes £16.4 billion in corporate bonds. That’s the sum the Treasury indemnifies the BOE for in case of losses.
Read more:
- Pricey Mortgages Wreak Havoc on Britain’s Top Homebuilders
- UK Mortgage Rates Stabilize Ahead of Key Year for Housing Market
- BOE Made £3.5 Billion Profit on Emergency LDI Gilt Purchases
–With assistance from David Goodman.
(Updates with comment from Bailey)
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