THE cash-strapped government will grab an expected £35bn surplus from the Bank of England’s bond-buying programme to reduce short-term borrowing.
The Bank of England Governor Sir Mervyn King said the move equated to a modest loosening of monetary policy, potentially giving a boost to the stagnant economy, and economists said the move may help Chancellor George Osborne to meet his debt reduction targets.
However, the Government’s budget watchdog, the Office for Budget Responsibility, warned the step would bring longer-term costs once interest rates start to rise.
Until now, the Bank has kept interest payments on the £375bn of government debt that it has bought since March 2009 as part of its asset purchase programme to boost Britain’s economy – payments which will total around £35bn by next March.
But now the Bank will have to transfer this money and future interest payments back to the government – bringing British practice in line with that in the United States and Japan, which also have central bank asset purchase schemes.
“Holding large amounts of cash (by the Bank) is economically inefficient as it requires the Government to borrow money to fund these... payments,” the Treasury said, adding it would use the money saved to reduce public borrowing in the current and future tax years.
Gilt prices rallied on the news as it promised lower bond issuance in the short term.
On Thursday the Monetary Policy Committee decided not to conduct further asset purchases, and Sir Mervyn said he had told the MPC of the Government’s plans before they made the decision.