BOE to Move QE Cash to Treasury in Step King Says Is Easing
The Bank of England will transfer income from gilts it holds under its bond-buying program to the Treasury in a move that Governor Mervyn King said equates to an easing of monetary conditions. Bonds rose.
The Treasury will use the money to reduce the stock of debt, lowering the amount of gilts held by the private sector and increasing the amount of money in the economy, King said in a letter to Chancellor of the Exchequer George Osborne published today on their websites. The amount of “excess cash” accumulated is expected to reach 35 billion pounds ($56 billion) by the end of March next year.
“That implies an easing in monetary conditions relative to the present position,” King said. The Monetary Policy Committee views the transfer as “having an effect similar” to the central bank buying gilts through quantitative easing.
The announcement came a day after the MPC decided to keep its bond-purchase target at 375 billion pounds ($597 billion) at a meeting at which policy makers were briefed on the income transfer. The move may provide a political boost for Osborne by allowing him to meet a debt target that he was on course to miss, said Michael Saunders, chief economist for Western Europe at Citigroup Inc. in London.
“This announcement may well have solved the key dilemma facing the chancellor for the Autumn Statement,” Saunders said in an e-mailed note. It may also “be a key reason why the MPC decided not to expand QE further yesterday.”
Osborne had been on course to miss his goal to have government debt falling as a share of gross domestic product in the 2015-2016 fiscal year after the return to recession at the end of last year sapped tax receipts. That left him the choice of risking the recovery by tightening fiscal policy or damaging his credibility by letting the target slip.
The yield on 10-year gilts fell as much as 10 basis points, or 0.01 percentage point, to 1.67 percent, the lowest since Sept. 10, and was at 1.69 percent as of 1:36 p.m. London time.
Osborne said holding large amounts of cash in the APF is “inefficient” and the change brings arrangements “into line with standard cash management practices for government activities and is also in line with the practices of the Federal Reserve and the Bank of Japan. (8301)”
The money to be transferred to the Treasury from the BOE comes largely from coupon payments on the bonds already purchased through the central bank’s Asset Purchase Facility. The Treasury will use the funds to reduce debt.
The letters also say that the BOE will retain the principle on maturing bonds that it already holds through the APF. The first bonds will mature in March and King said the MPC will decide what to do with that money.
“The appropriate size of the asset-purchase program will be reviewed and decided by the MPC at each policy meeting,” King said. “So the size of any asset purchases or sales will need to take into account the repayment of maturing bonds.”
The Office of National Statistics and the Office for Budget Responsibility will rule on how the money is accounted for in the public finances, though the Treasury said there will be an impact on the central government net cash requirement.
Today’s agreement will reduce the amount of gilts the Treasury will need to issue and Osborne will set out a schedule for next year’s gilt sales when he makes his economic statement in Parliament on Dec. 5.
The money to be transferred from the coupon payments currently stands at 23.8 billion pounds and is expected to reach 35 billion pounds as of as of March 2013, the Treasury said. The payments will be staged. About 11 billion pounds in net earnings in the current fiscal year will be transferred to the Treasury by April 2013 with the remaining 23.8 billion pounds drawn down over the course of the following 12 months.
Subsequent earnings, estimated by Saunders at about 15 billion pounds a year, or 1 percent of GDP, would be paid to the Treaasury on a quarterly basis.
The process will probably be reversed when the central bank begins to tighten policy either by increasing its benchmark interest rate or selling the gilts it holds.
“This smoke and mirrors will fool nobody,” Rachel Reeves, who speaks on Treasury affairs for the opposition Labour Party, said in a statement. “We will look very closely at how the OBR and ONS account for this change and whether it ends up costing the taxpayer more in the long-term.”