Pouf! Treasury may write off billions in a disappearing act
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UPDATED:
21:06 GMT, 5 May 2012
Britain could be just eight months away from cancelling billions of pounds of public debt that it acquired with made-up money, Financial Mail has learnt.
The first 8billion of gilts – Government bonds – bought under the Bank of England’s quantitative easing scheme will be due for repayment from the start of next year.
That means the Treasury will give the Bank 8billion to redeem gilts that the Bank bought with cash that it conjured out of thin air.
The Bank, a nationalised industry whose shares are owned by the Treasury, could then return the 8billion to George Osborne and his colleagues, who will in effect have spent 8billion of free money.
Until now it had been thought that
any decision on what to do with the 325billion mountain of gilts bought
by the Bank under the quantitative easing scheme was far in the future.
But it has emerged that with
8billion due for repayment next year, the Bank needs to decide whether
to recycle the proceeds into fresh gilt purchases, or simply hand the
money back to the Treasury.
Should it do the latter, it would
suggest that the entire programme – equivalent to more than 20 per cent
of gross national product – is being financed with money printed out of
nowhere, with no prospect of the gilts in question ever being sold back
to private investors, which is the official position.
Compounding the ‘funny money’ aspect
of the quantitative easing scheme is the fact that the Treasury has
already paid the Bank nearly 12billion in dividends on the bonds the
Bank has ‘bought’.
A much larger figure is expected to
be disclosed in July when the latest annual report for the quantitative
easing scheme is published.
Governor Mervyn King will this week
chair the first meeing of the Bank’s Monetary Policy Committee since the
announcement that Britain is experiencing its first double-dip
recession since 1975. It is also the first meeting since the end of the
current phase of the 325billion of gilt purchases came to an end.
The Committee has held the base rate at 0.5 per cent since March 2009, the lowest level since the Bank was founded in 1694.
Rupert Robinson, chief executive of
Schroders Private Banking, said: ‘I expect rates to remain on hold.
While there is a chance they will extend quantitative easing by a
further 50billion, I think the MPC members will keep their powder dry
this quarter.’