When the Bank sells gilts for the Government, cash is drained into the Exchequer, creating a shortage of money in the banking system. Commercial banks fill in the shortage by selling bills - short-term IOUs issued by companies - to the Bank of England. Heavy gilts sales have brought pounds 14bn of this paper into being, and the Bank often buys pounds 1- pounds 2bn of it in a day.
The result of such large and variable daily purchases by the Bank is that short-term money market rates - borrowing overnight or for a few days - have become extremely volatile. Banks that need short-term loans are sometimes forced to pay very high rates of interest.
Barclays and NatWest own a lot of the money market paper. Their critics claim this gives them too much influence over short-term rates, which are directly linked to bill rates. By both owning a lot of bills and deciding the timing of sales, they have an ace up their sleeves, which competitors claim amounts to manipulation.
With pounds 7bn less gilts sales in 1994-5, the paper mountain in the money markets could be halved in size. This should make short-term rates less volatile and the pickings for the two clearers will be leaner.Reuse content