Letter: Why Sunak’s Debt Management Makes Sense
Thanks to public debt purchases by the Bank of England, it now holds £850 billion in bank reserves, on which it pays interest. While the interest rate was low (0.1% from March 2020 to December 2021), this meant cheap financing for the government. But this is now becoming costly as the rate rises in an attempt to curb inflation.
The National Institute for Economic and Social Research argues that the Treasury has not “taken insurance” against this rise in interest charges (“Sunak lost £11 billion of taxpayers’ money in a mistake Debt, Economists Say,” Report, June 10). Specifically, if the BoE/Treasury had replaced much of these reserves with two-year debt in mid-2021, it could have locked in the two-year bond rate by 0.1%, saving £11 billion. in interest payments.
There is a catch. Pushing a large chunk of two-year debt into the market would have boosted the two-year yield well above 0.1%, negating the advantage.
More generally, this exercise would have been equivalent to canceling most of the BoE’s debt purchases all at once, potentially increasing borrowing costs across the economy and causing pain to all debtors, not only in government. Perhaps such a shock will be needed at a later date to shake up inflation. For now, the BoE prefers to tighten its monetary policy more gradually.
Department of Economics, University of Lancaster, Lancashire, UK