Repo Demand Stabilizes Bank of England Balance Sheet Amid Ongoing Quantitative Tightening

The Bank of England's balance sheet has stabilized, despite ongoing quantitative tightening measures. The central bank continues to sell gilts and reduce its stock of purchased assets, but this reduction is now being offset by strong demand for reserves through repo operations.

This shift in the mechanics of quantitative tightening has resulted in a stabilization of the balance sheet, which stands at around £40 billion above its projected 2025 low. The current reserve level remains above the Preferred Minimum Range of Reserves (PMRR) of £365-515 billion.

According to former Bank of England policymaker Paul Fisher, this is not an example of covert quantitative easing, but rather an unintended consequence of the central bank's shift towards a repo-led system for supplying reserves. The increase in reserves is driven by commercial banks' demand for short-term repos, which requires them to hold more gilts as collateral.

This may support relatively stronger demand for short-dated government debt, particularly as haircuts are lower for shorter-dated gilts than for longer-dated ones. The implications of this shift are significant, and could mean that gilts moving off the Bank of England's balance sheet reappear on commercial bank balance sheets instead.