The media is concentrating on the supposed efforts being made by the Bank of England to control inflation but which are actually intended to increase interest rates to the point where they are at their highest level since before the 2008 global financial crisis.
I am not in the slightest bit convinced that the Bank of England now has any serious objective with regard to the control of inflation. They admit that their models don't work when it comes to forecasting what inflation might be.
They are very obviously not succeeding in exercising any control, which is unsurprising when the tools available to them are wholly unsuited for the task, but they use them, nonetheless.
The obvious conclusion to draw as a result is that they are either incompetent, or have another agenda. I am going to be generous and will assume that it is the second of these two options. The real agenda is to increase interest rates, come what may.
There is very strong evidence to support that hypothesis. I only had to look at the quarterly report of the Bank of England Asset Purchase Facility, which manages the bonds acquired by the Bank of England under the quantitative easing programme to find this data:
That table shows the value of assets acquired by the APF at 31 December 2022.
By 31 March 2023, the table look like this, using the same headings::
Over that quarter the APF sold £5.8 billion of private sector bonds and £19 billion of government bonds.
The intention of these sales - and most especially the gilt sales - which did nothing to help fund the government - was to suppress the price of gilts in financial markets. And as anyone who is familiar with financial markets will know, the interest rate earned on a gilt at a moment in time moves inversely to its price, so if the Bank of England is selling significant quantities of gilts on top of these the government already thinks it needs to sell to supposedly finance its day-to-day activities then the result is that the interest rate is forced upwards.
There was no reason for the Bank of England to seek gilts at this moment. It could just as easily have held onto those gilts until markets were calmer. But it sold them anyway knowing that to do so would help achieve its objective of pushing rates upwards, where it has every intention that they should stay.
And then we get headlines like this in the Guardian:
The Bank must be delighted. They will be even more pleased that a supine Chancellor has said that he will support all their plans.
I think this is class warfare. This recession will hardly touch the rich. Many will see their real incomes rise. The majority in the country will suffer. What other conclusion can I come to when this crisis is being manufactured quite deliberately and wholly unnecessarily by the Bank to impose devastation on millions?
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Timely, Richard, and spot on. This was exactly the subject of discussion with my visiting, campaigning daughter over dinner after the Channel 4 news lats night.
Just one query. Typos apart, I don’t quite see where your 5.8 figure comes from, based on the figures you’ve highlighted here. Perhaps, I’m being dumb… but can you enlighten me?
Typos corrected I hope
The £5.8 bn is the reduction in private bonds held
“- was to suppress the price of gilts Uni financial markets. And as any9one who is familiar with financial markets will know, the interest rate earned on a gilt at a ointment in time..”
Too flippant for a Saturday morning maybe, but tell me more about this “ointment in time,” please.
I managed to publish a draft
Sorry!
I hope corrected now
Selling existing gilts at a loss, and thereby driving down the price of their remaining holdings, and driving up interest rates which increases debt service costs on new gilts and other borrowings, seems doubly or triply masochistic. Would any commercial operator do this? So why is this a sensible intervention in the market?
I hope the bank is taking care to avoid the problems of liquidity and increase risk of bank failure that QT seems to have triggered in the US.
That said, no doubt there would be a bail-out, which would be bad for some creditors but good for others with deep enough pockets and enough patience to pick up illiquid assets at a discount.
I very much doubt the problems QT is creating are being noted: dogma rules over experience in Threadneedle Street
This action by the BoE makes no sense to me at all. Am I missing something?
Why would there be a policy to essentially upset a load of people?
Whichever politicians are in power are going to get the blowback. There is some really evil logic at work here – this is anti-social and socially destabilising – it has all the hallmarks of the deliberate despoiling of our society.
Are the Tories that bad, that they have gone all nihilistic and are trashing the place before they leave, like some invading power who are being kicked out? All we need now is the helicopters above Parliament.
It seems so. What a state we are in eh? But I bet they’ll be no stupid post it notes when the Tories leave – albeit eventually.
They seem to think the country will accept their fate
Evidence, so far, is that they are right
Yes, it feels that way…(very long resigned sigh)………………
@ Richard Murphy
“And as any9one who is familiar with financial markets will know, “…. I am not familiar with financial markets, and I hope you bear with me as I try to get my head around your post and what the BOE has done.
If I understand you correctly (and I may not have done, so please correct me as I’m willing/desperate to learn) the BOE put £19billion of government bonds (gilts.. I looked it up on your Index) on the financial market to be sold to whoever buys these things. Does putting so many gilts on the market over just 3 months in effect ‘flood the market’? If that’s what happened, then I understand why that lowers their price. But why would that then increase the interest rate paid on such recently sold/purchased guilts? That’s confused me; I’d have thought it would lower the interest rate paid on them, but you said it increased their interest rate.
So, after wracking my brains, the only reason I can think of is that selling so many bonds so quickly (and I’m assuming that’s what’s happened here) means that the interest rate paid on them has to increase in order to make them more attractive to buyers; a kind of compensation mechanism for there being so many of them kicking around so quickly. If so, then why sell so many of them so quickly? Why not just dribble out their sale instead to get a better price, and pay lower interest on them to boot? What was the BOE’s reasoning for doing so? IF there was no pressing need to do so, then double why???
It doesn’t make any sense to me. If I’ve read your post correctly, the BOE has put itself in the position of flogging of a load of guilts, at cut price, and just increased the interest payable on them by, presumably, the Tresuary and, by extension, the government. I’m thoroughly confused… ARRGH!
Those in a position to buy these guilts can buy them at a lower value than normal, and get higher interest on them too… a double-whamy in their favour? So the rich ger richer, and everybody else has to suffer higher interest charges (does interest paid on guilts somehow affect other interest rates too? I don’t actually know if they do.) If so, then that is so twisted, it’s sick!
My head’s about to explode, so I’m going off to do some gardening now.
Sorry to do head explosion
Gilts are issued for a fixed period. I’ll do the simple explanation so let’s assume a £100 fifty year gilt is sold for £100 with an interest rate of 1% i.e. £1 a year
The £100, fifty years and interest rate do not change over the life of the gilt
Now suppose after a year the market thinks interest rates should be 4%. This long dated gilt (chosen deliberately for that reason) will have to fall in value from the £100 issue price to something not much above £25 to achieve that in simple terms (it will not be £25 exactly because the redemption value stays in place, but given the redemption data is a long time away in this case redemption has little impact on value, again deliberately chosen for that reason).
So, if the government oversupplies the market with gilts compared to what it needs to issue and so forces the interest rate up to persuade people to but them it must force the price of those gilts already in issue downwards. The bizarre consequence is that to force the interest rate up, the Bank of England must sell the gilts that it owns at a loss, and that is exactly what it is doing.
Is that any clearer?
Sandra
I’ve been worried about what you might be doing to your garden, lol.
Forget BoE shenanigins for now:
‘fixed interest’ bonds &c. are issued with a maturity date (when the capital is repaid); the interest – known as coupon – does not change (cf it is ‘fixed’), the holder receives same amount every half/year.
In the ‘economy’ interest rates are volatile; I’ve lived through highest and lowest UK rates ever, halving/doubling in one change, and BoE rate changing twice in one day.
Gilts are used by the ‘big boys’ (sic) as an alternative to cash; if market rates are say 5% no-one’s gonna buy a 4% gilt – UNLESS it’s available for less than its face value cf. sold at a discount, and that price is calculated to provide the buyer with the 5% return until maturity.
The problem recently is that market rates increased – dramatically, which as you can infer from above caused prices of pre-existing FI securites to FALL. Consequntly those being used as collateral no longer offered sufficient cover, so margin calls went out en-masse and particularly pension funds did not have sufficient liquid funds to cover… it became literally a fire sale.
NOW you can add BoE – and others’ – shenanigins, to make everyone’s heads hurt…
The only conclusion I can come to is that these actions are being taken to strengthen the currency over assets, it is dangerous but you must first look across the pond to the USA.
The whole debt ceiling negotiations are some what irrelevant because they will and have to raise that with conditions attached yet the catastrophy is already baked in and will happen weather the Debt Ceiling get’s raised before or even after a default. as of the 31st May they are down to 40 odd billiion dollars
The USA will have to flood in 1 trillion of tresuries no matter what sucking more liquidity out the banks and will now enter the debt death spiral or default and the snake ieats t’s itself deflationary event.
They are some what agreed on the former action rather than the latter but either way the dollar is set to suffer in either outcome. It is interesting that you can rig a system to win no matter what and still somehow lose…. I guess that really means it’s impossible to rig a fiat system against reality for only so long.
I think you need to be less cryptic: what your argument might be is hard to work out except for the fact that you think that the dollar is going to have a bad time, which it already is
the Today program circa 7.35 finally had a dissenting voice. The Head of the New Economics Foundation. She was asked “is it that you are just not brave enough to say to people you have to be poorer? ”
She said we were faced with political choices.
Lord Lamont followed her and urged us to admire Jeremy Hunt for his truthfulness.
But at least someone is challenging.
It was pointed out that she is standing for Labour. Will she be allowed to continue to say these sorts of things.
Lamont
The man who soid he had no regrets about Black Wednesday
“Lord Lamont followed her and urged us to admire Jeremy Hunt for his truthfulness.”
Was that a typo? Not seen much truth from J Hunt.
Lord Lamont followed her and urged us to admire Jeremy Hunt for his ruthlessness. That’s better.
The BoE has been taken over by the Mafia.
Unless I am reading it wrong you are showing the bond holdings.
Did they sell the bonds or did they mature?
Does it matter? i.e. sale or maturity, is the effect on bond prices and interest rates the same?
The same
Money was still taken out of the market
I don’t know what the sales versus maturities were in 2023 Q1 but this letter suggests about £37 billion matured between February 2022 and March 2023 (so, assuming the profile of maturities remains reasonably flat in the short term, expect that should continue at around £8 billion per quarter), and from November 2022 to April 2023, the combination of maturities and sales had reduced the stock of gilts by £59.7 billion (so perhaps £16 billion of maturities which would mean £44 billion of sales, or £22 billion of sales per quarter).
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1153845/Letter_to_the_Chancellor_20230428.pdf
So Richard’s number appears to be in the right ballpark for quarterly sales.
More specific quarterly figures separating sales and maturities may be available somewhere but I haven’t seen it.
I used the APF data, and they do not define it better
Well it’s the last chance salon with the monied establishment to milk the system for gain before the Tories get thrown out. As any anthropologist will tell you the problem particularly for human beings is how to control the free-riders amongst them!
So much policy in the UK currently makes no sense, unless we infer darker motives for those in power.
1) The cost of containing inflation is, being thrown entirely onto those with debts who are mainly younger/low paid working people, and companies wothout cash surpluses. Meanwhile those with positive assets (wealthy, elderly, energy providers) are receiving a cash bonanza as interest rates rise. Far from levelling up, this will massively worsen wealth inequality in UK.
2) Bizarrely for a conservative government, they are putting buy to let landlords (at least those with mortgages) under a massive squeeze at the same time as planning to remove no-fault evictions and requiring compulsory upgrades to property standards. This might help cash rich landlords buy out mortgaged landlords in a fire sale, but again it is bizarre behaviour for a conservative government!
One could be forgiven for thinking this is an all-out war on the middle and low-paid classes, designed only to enrich the wealthiest. But surely this would be electoral suicide for the Tories? Are the forces who were really behind Liz-Trussenomics, somehow back in control?
Remember this is a government of Cheats and Clowns so you shouldn’t expect logical and balanced policies!
I don’t really know who the Conservative Party represents at the moment. The wealthy are often there because of heavy indebtedness, so the fiscal policies make no sense. The wealthy often have global businesses so the trade policies make no sense.
It seems the focus is solely on social control, and everything else is ignored. I’m surprised that even the wealthy portions of their demographic haven’t revolted.