DMO chief executive Robert Stheeman says the firm is watching the £325bn quantitative easing programme “incredibly carefully” amid fears that the size of the programme is set to distort prices in the gilts market.
The Bank of England has bought almost a third of gilts in issue, reducing the tradeable supply and potentially impacting on investor interest.
Stheeman conceded that QE could push up the cost of government debt, pointing to instances that have already seen liquidity affected. The DMO must raise £168bn in 2012 in order to fund the deficit as well as help finance public services. The Office for Budget Responsibility has estimated that £900m would be added to debt costs by 2015 if we saw an increase in gilt yields of just 0.1%.
Speaking to The Telegraph, Stheeman says: “As long as the gilts market remains liquid and efficient, and is able to take down our supply with the minimum amount of disruption to the price formation mechanism, I am happy. If we see signs that liquidity in the market is being seriously affected by the Bank’s purchases, of course we would talk to the Bank. We watch their operations incredibly carefully. But so far so good.”
The BoE has estimated that the original £200bn of QE cut gilt yields by about one percentage point and the chancellor has claimed the low rates are saving “this government a total of £36bn compared to its predecessor”.
A number of economists are concerned about the continued gilt purchases with two members of the Monetary Policy Committee urging the governor to look at buying other assets.