Several people have reminded me that the government and Bank are going round in circles. They have sold £3.5 billion of 2015 stock, and bought back £3.5 billion of stock with maturities in the range 2014-18. They did the first to fully fund their spending. They did the second as part of their quantitative easing policy.
What’s the point? It makes work for the Debt management Office and the Bank. There is the chance that the people selling the gilts back will then go and spend the money and help create more activity, whilst there is also the chance that the people buying the new stock would not have spent the money anyway and might not have kept it here in the UK as a bank deposit. That might have been a pig flying past your window.
I think it shows there is still muddle around what they are trying to do. One simple way of easing money supply is to sell less debt than you need to borrow and print the rest. It is more difficult doing it by fully funding the deficit first, then negating some of that by buying back similar gilts to the ones you have just sold.
It would help the markets if we knew what they are trying to do. Is there a target interest rate for longer dated government borrowing they wish to hit? Is there a specified quantity of money they are trying to create? Do they have a target in mind for the increase in bank deposits? They are in danger of paralysing the gilt market because no-one really knows what the authorities are up to, but they do understand that for the time being the authorities can make the prices what they want them to be. If they do not maintain confidence in their actions they will lose this ability, and then things will get a lot tougher for them.