RAPID RESPONSES

The debate goes on

[Re: We need an open contest to decide who will run the Bank, Thursday]
The three main objections to a possible cancellation of the QE gilts appear to be, firstly, that the Bank of England would become insolvent, secondly, that we would lose the ability to sell those gilts back to the market to drain liquidity should inflation return and, finally, that it would be illegal under the Maastricht Treaty. The first issue is simply a matter of accounting, and could be resolved by the Asset Purchase Facility issuing a non-interest-bearing bond to the Bank for the value of the written-off gilts. On the second point, the Bank has plenty of other money market mechanisms (like selling Treasury Bills, or raising reserve requirements) to remove excess liquidity from the economy. And finally, given the lack of compliance to the Maastricht Treaty by most of its other European signatories, it would be difficult to explain why the UK should have to keep so rigidly to the rules. I still think the biggest obstacle to a major gilt cancellation would be one of credibility. What would international capital markets think about it, even if the net result was an much improved fiscal position for the UK? That uncertain reaction alone would be enough to make any chancellor think twice. However, a subtler redirecting of the coupon interest earned on the QE gilts to the Treasury, to significantly reduce the UK's annual borrowing requirement, might be more tempting.

Jim Leaviss, head of retail fixed interest at M&G

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