I have added a new glossary item on open market operations as I needed to define the term for some work I am doing. The entry is as follows:
Open market operations are a tool used by a Treasury or central bank that seeks to influence interest rates by controlling the money supply.
To achieve this goal the agency undertaking the activity buys or sells the bonds (or, in the case of the UK, the gilts) issued by the government of the jurisdiction in the open market. As such, open market operations are trades in bonds already in issue, rather than in newly issued bonds or gilts.
The aim of these trades is to influence the money supply and, therefore, the interest rate on central bank reserve accounts by either increasing that supply (which reduces interest rates and stimulates economic activity) or reducing it (which does the opposite).
The sums involved are quite considerable. From 2010 to 2021, the UK's Debt Management Office, on average, owned more than £115 billion of gilts so that it could engage in open market operations. The range of balances held was, however, smaller than this implies, with a maximum of £127 billion in 2010 and a low of £107 billion in 2020.
Although these gilts are owned by a UK government agency that is under the direct control of HM Treasury, it would seem that they are included in the UK national debt by the Office for National Statistics, which makes little accounting sense.
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Is there a glossary entry coming for the Dunning-Kruger effect?
Since I am sure you are not who you claim to be, why not try writing it?
I’ve just sold £100,000 of bonds to myself.
I am now £100,000 in debt to myself.
The bank is concerned that I can’t make ends meet cos there is no money left.
Oh dear what should I do?
I am deep diving this issue again – for an academic paper – and it gets worse every time I look
Me to BoE: ……Spare a penny for the (self inflicted but actually non-existent in this case) poor…… guv (sitting outside BoE)
BoE: ……………..are you a bank or banker my man?
Me: ……………….not in the strict sense of the word – but I do lend from time to time so why don’t we do “let’s pretend?”
BoE: ………………excellent! here’s my card – give me details of your account I’m sure we can do business – always happy to help out a colleague in need..
Me:………………..thanks guv(enor of the Bank of England) – looking after poor an’ needy bankers in the seasonof good will……god bless you kind sir.
🙂
🙂
It is the blind leading the blind..
Here is my go….
Open market operations are conducted by the Bank of England to add or drain Reserves (the BoE is the “bankers’ bank” and Reserves are the money held by commercial banks in their bank accounts at the Bank of England). This is done in order to maintain interbank interest rates at or close to desired, policy levels. This is typically done by borrowing/lending money overnight in the open market (hence the name) against gilt collateral (Repo); lending money adds reserves and prevents overnight interest rates going too high, borrowing money drains reserves and prevents overnight interest rates falling too low.
Whilst most open market operations are conducted just overnight it is often the case that the Central Bank will forecast a shortage/excess of Reserves will persist for a longer period. In this case Term Repos (borrowing or lending cash against gilt collateral for longer periods – 1 week to 1 month, perhaps – will be conducted. Occasionally, outright purchases or sales of gilts (in the secondary market) will be used to add or drain reserves on a semi-permanent basis.
In recent years, outright purchases of gilts have been huge. This is called Quantitative Easing (QE) but in essence it is merely an extension of traditional open market operations and has the effect of adding huge quantities of Reserves into the system and keeping interest rates across the entire maturity spectrum very low. Because of the size and novel nature of this intervention the Government gave specific authorisation and, through the Asset Purchase Facility (APF) all the profits/losses/interest on the portfolio of gilts purchased is borne by HMT. As such, they should not be considered as either part of the National Debt or the Bank of England balance sheet.
In addition to BoE open market operations and QE, the DMO also operates in the gilt market. They are charged with managing the National Debt. This mainly means selling gilts at auction on behalf of HMT but they are also responsible for the efficient operation of the market and in this role they will buy and sell particular gilts to manage overall duration of the debt portfolio and provide liquidity in individual issues as required. This is separate from any activity the BoE is involved in.
I like it, and will add it the glossary – but it assumes a lot of prior knowledge.
Thank you.
Yes – always a balance between length and comprehensiveness.
Happy to expand it to try and explain some terms if it helps.
Better to add more glossary entries to link to it
My only concern with what you have written is with respect to the DMO. Now, I might be wrong but I do not think that gilt holdings held by the DMO are considered part of the national debt. Their holdings are about portfolio management; mainly duration and liquidity – buying shorter, less liquid issues and selling (issuing) longer benchmark issues.
What they buy is considered “retired” what they sell is “new issuance”. I will try and confirm this.
I am using ONS data and right now that can’t be reconciled with the DMO, but I have also now identified timing issues in the data that need correction so I will check again when I have corrected for that, if required.
May I ask if OMO are a tool that can be used to counter inflation at all?
The BoE might think so….
Hmmmm…. I am now confused!
First, I think it should be made clear that the BoE holdings, whether through “normal” open market operations or in the APF under the QE programme are totally separate from the DMO holdings of gilts. Indeed, BoE operations will often run in the opposite direction to the DMO; auction of a new gilt by the DMO drains Reserves which are then added by the BoE via repo (or in a QE world, outright purchases). As such, I think any reference to DMO holdings of gilts should be omitted from a section on Open Market Operations (which are always conducted by the BoE, always about Reserves and interest rate policy implementation).
So, while that may help for this narrow glossary entry for “Open Market Operations” it has opened up more issues about the size of the National Debt. Now, we are not talking APF sized sums….. but we are looking at £100bn-ish.
I take the DMO data as a starting point. It may not be exhaustive (ie. no NS&I etc.) but it is detailed and probably accurate. In particular I looked at “Gilts in Issue” and “Government Holdings of gilts”. I took two random (ish) dates in 2018 and compared amounts outstanding in each gilt issue with the Government holding in each issue.
Other than auctions of new gilts I expected to see one of two possibilities…
a) Gilts in issue stays constant whether government holdings go up or down… meaning that “Gilts in Issue” is a gross figure and Net Debt should have Government Holdings subtracted. Or…
b) Gilts in Issue declines pound for pound as Government holdings rise…. meaning that “Gilts in issue” is already a net figure
In fact, what I saw was that “Gilts in Issue” INCREASED pound for pound as Government holdings increased. What is going on? In addition to its responsibilities to auction gilts to “fund” the National Debt (on behalf of HMT) it also acts as an investment manager for money held by Government for specific purposes. The money is invested (largely) in gilts. But, rather than buy from the gilt dealers in the market they buy new issue NILO gilts direct from HMT at the prevailing market price. Hence, an increase in government holdings DOES increase the “Gilts in Issuance” number. (If they need to sell the NILO gilt HMT will buy at market price and cancel it).
So, “Government Holdings of Gilts” should be subtracted from “Gilts in Issue” when calculating the size of National Debt.
This does raise the question. If DMO can purchase gilts direct from HMT why can’t BoE for QE??
Clive
I am also confused.
I am working on this again today. I might mail you.
Richard
“Hmmmm…. I am now confused!”
The confusion seems widespread, and this Blog seems to return repeatedly to the recondite nature of the BoE/Treasury operations in this area. Is this not, perhaps a problem that begins in the inadequate presentation of BoE and Treasury accounts; and in particular the lack of consolidated accounts? Is it too simple an observation to believe that a full set of consolidated accounts would clarify immediately what was, and what wasn’t being treated as the National Debt?
I have now at keast reconciled the DMO and ONS positions
The ONS opsition is irreconcilable with reality
I am now in a Labyrinth, without Theseus’s somewhat more then useful ball of thread.
As I understand it the BoE claims that QE is a tool of Central Banks used to meet inflation targets. The DMO, however is the Executive Agency responsible to the Treasury as: “the body responsible for financing the Government’s cash requirements and …. responsibility for Exchequer cash management” and replacing the BoE (DMO, dated 2005: https://www.dmo.gov.uk/media/ztkn5d2s/fwork040405.pdf).
The structures, and reporting responsibilities of these operations (BoE and DMO) are quite distinct; at least that is the appearance.
Within the United Kingdom Debt Management Office, there are slightly elusive statutory functions of the Commissioners for the Reduction of the National Debt (CRND). The members of the CRND are: The Chancellor of the Exchequer, The Governor and Deputy Governors of the Bank of England, The Speaker of the House of Commons, The Master of the Rolls, The Accountant General of the Senior Courts, The Lord Chief Justice. In 2016, the DMO’s Chief Executive was officially appointed as the Government Broker. The CRND was instituted in 1786, originally chasing the unicorn of a Sinking Fund.
“The Commissioners’ powers and functions are laid down in the Acts dealing with the individual funds or accounts and there is no statutory provision requiring the production of an annual report or other published information about their activities. However, annual report and accounts are produced for the various funds and many of these are eventually published in White Paper form and are available” (DMO).
It is quite difficult, at least from the DMO website, to understand exactly what are the nature or precise modern responsibilities of the CRND; and given this strange, disparate body’s membership (or purpose?); or the specific debt functions it possesses in the modern DMO; or how the DMO and BoE responsibilities in debt management hang coherently together.
Given this network of recondite responsibilities and the opaque nature of their reconciliation, combined with the implications of the discussion above, I confess that I am officially, comprehensively and hopelessly lost in the Labyrinth.
See thsi morning’s post, just put up.
Your confusuion is wholly justified.
The critical thing is does it work in practice?
Would it be easier to just change the intrest rates?
Both have a role