The City is all a flutter over today's announcement that the Bank of England is to transfer the coupon, or interest, on the gilts it has been buying under the £375 billion quantitative easing programme back to the Treasury. At a stroke, it seems, government debt will be reduced by £35 billion and the public finances will have received a much-needed fillip.
Three points can be made on this:
- the Bank of England did not want this change. It regarded the accumulated coupons as insurance against the likely capital losses it would make on selling back the gilts it has bought, some probably at the top of the market.
- Other countries adopt the practice of automatically transferring interest back to their treasury departments though this does represent a rule change in the UK, and will be seen as a reflection of official concern about the public finances.
- To the extent these coupons were accumulating at the publicly-owned Bank, it amounts to a clever accounting change.
This is from the initial assessment of the change from the Office for Budget Responsibility:
* Public sector net borrowing will be lower in the near term than it otherwise would have been, as the Treasury receives the coupon payments on the gilts held by the APF (Asset Purchase Facility), minus the interest that the APF has to pay the Bank for the loan that allowed it to purchase them.
* Net borrowing is then likely to be higher in future years as the APF moves into deficit and the Treasury has to cover this. The APF's interest payments will increase when Bank Rate starts rising. And the sale or redemption of gilts is likely to leave it facing capital losses, as the amounts received will probably be smaller than the amounts paid for them.