Bailey Defends BoE Gilt Reduction as Capacity-Building Move

Bank of England Governor Andrew Bailey on Sunday defended the central bank's decision to reduce its holdings of British government bonds, saying the move would restore its capacity to intervene in the future if needed.

Speaking at an event in London, Bailey argued that shrinking the roughly £80 billion portfolio of gilts accumulated during quantitative easing was not a signal of tighter policy but a precautionary step. The BoE has been actively selling bonds since November 2022, part of a broader unwind that has drawn criticism from some market participants who argue it risks tightening financial conditions at a time when growth is already weak.

Bailey pushed back on that framing. The reduction, he said, gives the central bank room to buy again during a crisis without hitting self-imposed limits on gilt holdings. "We need to have the capacity to act," he said. "Running down the stock now is how we preserve that option."

The comments come as the BoE faces a delicate balancing act. Inflation has eased from double-digit peaks but remains above the 2% target, while the economy has barely grown. Markets currently price roughly two quarter-point rate cuts this year, though the timing remains uncertain. The gilt sale program, known as quantitative tightening, is running at a pace of about £10 billion per quarter.