'Quantitative easing' showing benefits

The Bank of England’s policy of “quantitative easing” is continuing to push interest rates down and ease credit conditions.

Demand was again healthy in yesterday’s “reverse auction” of gilts, where the Bank stands prepared to buy government securities from the market in return for cash, thus generating additional spending power in the economy and pushing inflation, in due course, back up towards its 2 per cent target.

The retail price index, published today, is expected to show a negative reading for the first time since 1960; the CPI will fall close to zero by the summer. The Bank is seeking to push inflation back to its 2 per cent target rate.

The yield on benchmark 10-year gilts fell more than 5 basis points to close 14 basis points lower at 3.21 per cent.Gilt prices, which work in an inverse relationship to their yield, rose sharply.

The Bank purchased £3.47bn of eligible gilts in the 2020/2032 maturity from market players, plus a marginal £33 million from institutional investors. So far the Bank has disbursed £26bn out of an initial allocation of £75bn. The reverse auctions are being held twice a week.

However the bank did find a certain reluctance to sell gilts yesterday, with the auction covered on a ratio of 1.83 times, compared to April 14’s sale, when more than three times the eventual value of bonds bought had been offered to the Bank. That may signal a reaction to next year’s near £200bn gilt issuance programme.