The Bank of England should reinvest maturing gilts it has acquired as part of its quantitative easing regime to purchase more gilts or other assets, according to Capital Economics.
Chief UK economist Vicky Redwood says the Bank’s monetary policy committee will be forced to decide what to do with maturing gilts at the beginning of next year, if not sooner.
She says: “We expect the committee to maintain its current loose stance of policy by re-investing the proceeds of the gilts, as the US Fed has done.”
However, the value of gilts set to mature next March amounts to just £6bn, or 2 per cent of the gilts it owns, and is therefore not a pressing problem.
“Nonetheless, the decision marks another unprecedented step in unconventional policy. And a lot more gilts mature from 2014 onwards, she adds.
She says the two options open to the MPC are to reinvest the maturing gilts or to “extinguish” the money from the system.
Redwood says the former option would maintain the total level of asset purchases and follow a similar move by the US Federal Reserve.
The economist says extinguishing debt would be unlikely as more stimulus is likely to be required.
She adds: “The Fed has lengthened the average maturity of its purchases, by using the proceeds from maturing short-term debt to buy longer-term debt.
“Accordingly, this might be a good time for the Bank to launch its own ‘Operation Twist’ or even to start buying assets other than gilts.”