View from City Road: The floating rate pushed to its limits

The determination of the bond markets to see bad news around every corner is making the task of funding the Government's borrowing ever more difficult. As the Chancellor noted in his Mansion House speech, the markets are making the teenage scribblers look like incorrigible optimists.

The Bank of England announced yesterday that this month's gilt auction would be another tranche of five- year floating rate notes, which before this year had not been issued since the late 1970s. The Bank is understandably reluctant to pay the interest rates of nearly 8.5 per cent which the market is demanding on conventional long-dated stock.

Underlying inflation is standing at 2.5 per cent and the authorities are pledged to push it lower by the end of the Parliament. Plainly the Bank wants to avoid locking the Government into unreasonably high debt-servicing costs that are as much the result of global as domestic uncertainties.

There is a limit to how much floating rate stock the market will take, however. As Simon Briscoe of Warburg Securities argues, the Bank would be well advised to give the market some idea how much more floating rate debt it intends to issue. Pension funds and life assurance companies would like to see some longer-dated stock pretty soon.