The Bank of England covers 50% of all newly issued debt and will hit its £375bn QE target by the end of October – Here’s why they print more
With the Bank of England reaching its money printing target of £375bn most likely by the end of the month we thought it high time to take a peak at the BoE’s balance sheet and see what choices there are for King et-al.
So, as a recap here’s where we are – back on July 5th of this year the BoE announced that it would increase the ‘QE’ portion of its balance sheet (known as the Asset Purchase Facility – well, it sounds so much better than printing money) from £325bn to £375bn:
5 July 2012
Asset Purchase Facility: Gilt Purchases
- The MPC has decided on a further £50bn of gilt purchases as part of its programme of asset purchases financed by central bank reserves. Asset Purchase Facility (APF) gilt- purchase operations will therefore resume in the week beginning 9 July 2012.
- The range of gilts eligible for purchase will remain unchanged.
- The Bank will continue, normally, to conduct three auctions a week: gilts with a residual maturity of 3-7 years will be purchased on Mondays; of over 15 years on Tuesdays; and of 7-15 years on Wednesdays.
- The Bank intends to purchase evenly across the three gilt maturity sectors. The size of auctions will initially be £1bn for each maturity sector. As usual, this will be kept under review throughout the purchase programme in light of market conditions.
- The Bank will confirm details of the following week’s operations each Thursday at 16.00. The Bank does not currently intend to purchase gilts where the Bank holds more than 70% of the “free float”, i.e. the total amount in issue minus government holdings. The Bank will, however, continue to keep the identity of gilts eligible for purchase in the APF under review.
- The MPC expects the announced programme of asset purchases to take four months to complete. The scale of the programme will be kept under review. The Bank does not intend to hold gilt-purchase operations on the bank holiday on 27 August. This has been taken into account when determining the auction sizes.
So here we are 4 months later, so what are the scores on the doors now? As of 4th October:
The total now stands at £362bn. With the BoE adding to this number at around £3bn per week the number will already stand at £365bn today, and will hit the £375bn ‘target’ by October 31st.
The next BoE meeting is scheduled for November 8th so it will mean that there is about a week where the BoE wont be in the market buying up bonds. But will it last?
Regular readers will know our thoughts on any central bank’s ability to stop the money printing once they start – they can’t, because it all boils down to the central bank, and in this case the BoE, essentially becoming ‘the market’.
The most recent Debt Management Office numbers have the BoE now owning through the APF more than 27% of ALL the UK gilts outstanding. Here is the total issuance up to March 30th 2012:
And since March 30th the UK has issued another £99.4bn. So today the total bonds outstanding in the UK stands at £1340bn. Of which the BoE owns some £365bn or 27%.
And here is what a central bank gobbling up UK debt looks like:
Since 1987 the increase in bonds has been 850%, but when you subtract the BoE’s bond holdings that total is ‘only’ 600%.
But more worryingly than the total 27% ownership that the BoE now has, it is the amount of new issuance covered that is much higher. Since the BoE started buying up UK debt at the beginning of 2009 the UK has issued about £724bn in new debt. Over that time period the BoE has bought up £365bn. Which means that a staggering 50% on ALL newly issued UK debt has been covered by the BoE.
So unless there is going to be a dramatic drop off in the bonds issued by the UK government in the next 6 months the BoE will have no choice but to meet that additional demand by extending their APF program.
During the fiscal year 2012 (April 1st 2012 to April 1st 2013) the total debt issuance by the DMO is penciled in at £164.4bn. And here is where we stand as of yesterday:
So we’re just over 6 months into this financial year and of that £164.4bn to be got away the DMO has already done £99.4bn or 60%. Which means that between now April 2013 the DMO will be looking to sell about £65bn in gilts.
With the BoE seeming to choose to cover 50% of new issuance through the APF it means that the BoE ‘only’ has to raise the AFP to around £400bn to see it though to the end of the financial year.
However, it is what is coming after April 1st 2013 that the BoE will have one eye on. Next year (2013/14) the DMO is planning to sell MORE gilts than it did this financial year. A total of £170bn.
This all assumes that the net cash requirement portion wont rise, which it probably will due to increased welfare costs and less then expected tax returns. We’ll probably get an indication of how much this will rise by in Osborne’s winter statement on December 5th 2012.
But for now if we assume the £170bn for next year is correct then King will have to announce an additional £85bn in 2013 to cover that £170bn at 50%.
If the BoE announces around £75bn in additional QE (taking the total to £450bn) in November or December this should be ‘enough’ to see the BoE through to around October next year before more QE will need to be considered.
However, and it is a big however, these amounts are only if the BoE and government want to tread water. After-all what has that £365bn in additional purchases got the UK to date? Unemployment is still above 8% and the UK is in recession.
Will King ‘blink’ just like Bernanke did out of frustration, and opt to go for more QE than he really has to in an attempt to get the economy moving? It is certainly possible, but the exact form that would take is unknown, ie could the UK get it’s own open-ended QE form?
There might be some that suggest that the BoE ‘pause’ in their QE just like did between January 2010 and October 2011, and they will cite the fact that interest rates didn’t spike as reason that the BoE wont be forced to do more QE.
Whilst it is true that rates went from 4% to 2.5% without QE, look at where rates are now. 10 year rates are now at the astonishingly low rate of 1.75% and the BoE is effectively keeping them pinned to the floor. There is a world of difference at stopping QE when rates are 4% and stopping QE when rates are 1.75%, and here’s why:
Just a 2% increase increase in rates means an additional £43bn in interest payments. And that is a problem when you look at this chart:
The UK already commits a whopping £46bn a year in debt interest payments, the idea that the BoE would risk letting rates go up and increasing that slice of the pie above seems absurd. But with rates pinned to floor it seems that they will have little choice but to extend QE either in November or December.
Link to this article: : http://www.goldmadesimplenews.com/gold/the-bank-of-england-covers-50-of-all-newly-issued-debt-and-will-hit-its-375bn-qe-target-by-the-end-of-october-heres-why-the-print-more-8351/