View from City Road: Short-sighted on long gilts

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It is all very well for the Chancellor to complain about the 'remarkably high' yields on gilts, and wish that greater confidence in the long- term inflation rate would bring them down. 'We need a good track record on that for some time to make it cheaper to finance our debt,' he told the Commons Treasury and Civil Service select committee.

But actions speak louder than words when pounds 50bn a year of fund- raising is at stake. Why is the Bank of England continuing to take such a tough stance against switching its gilts funding to the shortest end of the market, preferring instead to sell large amounts of stock that mature in the next century?

If the Chancellor is right, this is expensive funding. Yet because it is long term, the country is stuck with high interest payments for ages. Lucky investors, perhaps, but if Mr Clarke really believes we are out of the old inflationary cycle, he should be telling the Bank of England to sell large amounts of gilts that mature in less than five years.

They would, of course, be refinanced at lower interest rates well before the end of the century, and they have the advantage that they would attract the banks to buy more government debt. Indeed, it would make sense to do part of the funding in short-term Treasury bills, the government equivalent of an overdraft, which could be run down when long gilt yields fall. A switch of policy would prove the Government is putting its money where its mouth is.