Is the Bank of England monetising UK debt?

7th December 2011

After looking at the Euro zone for a couple of days I would today like to take a look at the UK economy. As an introduction I would like readers to think about something that took place yesterday. The UK Debt Management Office auctioned some £2.27 billion of 4 1/4% Treasury 2040 which is a UK government bond or gilt. Not such a surprise you might think as with the UK fiscal deficit we need to sell plenty of debt and in particular if we look at this gilt we also maintain a high average length of our natioanl debts maturity. The interesting counterpoint is that the Bank of England purchased some £1.7 billion of UK gilts which mature in the period 2038 to 2060 as part of its Quantitative Easing operation!

Is this debt monetisation?

In effect yes and is about as near as we are likely to get. The Bank of England is not allowed to buy what is called a primary issue (which means something we are selling/issuing at that point in time). However it can operate in similar stock and as yesterday it bought £445 million of 4 1/4% Treasury 2039 you can say that it bought something as near as possible! One year apart in 29 years does not make much difference and as it bought some £509 million of 4.5% of Treasury 2042 you can see that it was surrounding the target area. So yes this was in my opinion debt monetisation by the back door so to speak.

The amount purchased was lower than the amount issued but it is also true that the Bnak of England also purchased much longer dated gilts out to our longest which matures in 2060. So if we allow for what is called duration then the effect of the purchases if we compared it to buying a 2042 bond would be higher than the £1.7 billion actually spent.

Whilst only £7 million was spent yesterday on our longest dated gilt regular readers will be aware that I have long argued that a weakness of QE is a lack of an exit strategy from its proponents. If we take the one suggested by David Blanchflower of letting the gilts mature than QE would be with us until 2060 which is not much of an exit!

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