Take Over Bid For UK Treasury

18th August 09 – Take over bid for UK Treasury

Following the news that the Bank of England is to buy a further £50bn’s worth of gilts, this question is starting to arise, is the whole QE programme no more than an elaborate scheme for monetising the UK Treasury’s ballooning debt? In other words is the B of E making a take-over bid for the Treasury.

Danny Gabay of Fathom Consulting said the news of the extra gilt purchases “reflects the fact that the bank has to all intents and purposes cornered the market for certain gilts or bonds, to which market participants may still need to have access.” What he is saying is that the central bank now owns so much of the gilts market that it has agreed to lend gilts, temporarily, through the Debt Management Office to ensure that banks are able to close out positions as necessary. Whirligig or what?

To elaborate, the B of E is to start buying gilts of both shorter and longer maturities than the 5 to 25 year set is was originally planning. In fact, it has suspended its purchase of four particular maturities of gilts once it had emerged that it had acquired as much as 70% of the total issue. What this all amounts to is that the central bank owns the country’s sovereign debt. At any rate, it will soon own almost half of the entire gilts market, currently worth around £400bn.

Coupled to keeping the Bank rate on hold at 0.5%, the extended QE programme sent the pound more than a cent and a half lower against the dollar at $1.6801 but it strengthened against the euro after the ECB left its key rate at 1%. Gilt yields dropped before settling at just above 3.7%.

I was thinking. Why doesn’t the Chancellor (a Scotsman) just say to the Governor (an Englishman) “just give us the dosh mate.” Or is that too Australian?

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