Bank denies it breached gilts procedure

THE BANK of England last night vigorously defended its tactics in the gilts market, after a pounds 2.5bn auction of stock was given a lukewarm reception by dealers, writes Peter Rodgers.

As questions were raised in the City about the Bank's ability to fund the Government's pounds 1bn-a-week borrowing requirement over the next year, it emerged that the auction was subscribed only 1.18 times - the worst result since the present series began in April 1991.

Market-makers besieged the Bank with complaints about the decision to cut base rates on Tuesday, as they went short of stock in preparation for the auction yesterday, amid suggestions that losses by wrong-footed dealers amounted to pounds 15m. But the Bank denied claims that understandings about the conduct of auctions include a tacit agreement that rates are not changed just before.

A spokesman said: 'The understanding is very clear, that we don't issue stock of the same maturity as the auction. The market cannot realistically expect more than that . . . Beyond that, it is a commercial decision for market-makers on how far they should go short of stock on an unhedged basis.'

Gilts experts said it was significant that the auction had a long 'tail', or spread, between the highest and lowest prices, indicating that the Bank had been obliged to accept poor prices to sell the issue. Some complained that Ian Plenderleith and John Townend, two top market figures at the Bank, were away on Tuesday, though alternates were in place, including Tony Coleby, who is senior to both.

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