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Boe To Buy £4bn A Year Of Gilts

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What do people make of this?

http://news.ft.com/cms/s/c83f8e00-e435-11d...20abe49a01.html

BoE to buy £4bn a year of gilts

By Paul J Davies

Published: May 15 2006 19:37 | Last updated: May 15 2006 19:37

The Bank of England will buy about £4bn of outstanding UK government bonds annually for the next three years as part of long-awaited reforms to the sterling money markets, the Bank and the UK’s Debt Management Office said on Monday.

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But is this not like using one credit card to pay the debt on another card.

Debt creates crime and in this case it’s the government committing fraud against it’s people.

2% inflation is a joke :D

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But is this not like using one credit card to pay the debt on another card.

Debt creates crime and in this case it’s the government committing fraud against it’s people.

2% inflation is a joke :D

Can someone pls explain what the BOE is hoping to achieve here...cos I'm lost

:unsure:

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Can someone pls explain what the BOE is hoping to achieve here...cos I'm lost

:unsure:

It's pretty complicated, but it's to do with the way the Bank transmits its policy interest rate through to financial markets.

Banks need either cash or deposits with the BoE to be able to meet their customers' need for cash and settle inter-bank payments resulting from things like cheque clearing.

The major clearing banks have accounts at the BoE they use to clear across, but at the moment these do not pay interest and are not allowed to go overdrawn, so banks effectively target a zero balance overnight.

This means that at the moment the BoE intervenes to buy, sell or lend sterling to banks that need it several times each day, to make sure that demand and supply for money is balanced, and the policy interest rate prevails in the markets.

Unfortunately, the unpredictability of the system means that the overnight interest rate in sterling markets actually fluctuates quite a bit around the MPC desired target, because there are always forecast errors or because something unexpected happens just before the close of markets.

The BoE is moving to a new system on May 18, where banks will hold much bigger accounts at the central bank, which they get paid interest on and which they can use to smooth out the day-to-day volatility. Instead of targeting a zero balance, they will target a positive balance averaged over the month between MPC meetings. As a consequence, the BoE will also be able to reduce its operations to once a week, instead of several times a day.

Anyway..... the point of all this is that banks need to hold higher balances at the BoE. To do this, the total quantity of base money in the system has to go up quite a bit, but don't worry all you monetarists out there, because none of this extra money will show up in the economy - it will all just sit in accounts at the BoE, so effectively it might as well not exist at all.

And to create the money, the BoE is going to buy quite a few gilts over the next few years. To some extent this is monetizing the government debt, but it is a one-time operation, and as they are being bought from markets rather than direct from the DMO, and given that the amount is only a small proportion of outstanding debt, it shouldn't have much impact on the price of gilts.

Phew.

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It's pretty complicated, but it's to do with the way the Bank transmits its policy interest rate through to financial markets.

Banks need either cash or deposits with the BoE to be able to meet their customers' need for cash and settle inter-bank payments resulting from things like cheque clearing.

The major clearing banks have accounts at the BoE they use to clear across, but at the moment these do not pay interest and are not allowed to go overdrawn, so banks effectively target a zero balance overnight.

This means that at the moment the BoE intervenes to buy, sell or lend sterling to banks that need it several times each day, to make sure that demand and supply for money is balanced, and the policy interest rate prevails in the markets.

Unfortunately, the unpredictability of the system means that the overnight interest rate in sterling markets actually fluctuates quite a bit around the MPC desired target, because there are always forecast errors or because something unexpected happens just before the close of markets.

The BoE is moving to a new system on May 18, where banks will hold much bigger accounts at the central bank, which they get paid interest on and which they can use to smooth out the day-to-day volatility. Instead of targeting a zero balance, they will target a positive balance averaged over the month between MPC meetings. As a consequence, the BoE will also be able to reduce its operations to once a week, instead of several times a day.

Anyway..... the point of all this is that banks need to hold higher balances at the BoE. To do this, the total quantity of base money in the system has to go up quite a bit, but don't worry all you monetarists out there, because none of this extra money will show up in the economy - it will all just sit in accounts at the BoE, so effectively it might as well not exist at all.

And to create the money, the BoE is going to buy quite a few gilts over the next few years. To some extent this is monetizing the government debt, but it is a one-time operation, and as they are being bought from markets rather than direct from the DMO, and given that the amount is only a small proportion of outstanding debt, it shouldn't have much impact on the price of gilts.

Phew.

That seems to me like they are creating money out of thin air (fractional reserve) to buy back debt that was created out of thing air which nullifies the original debt? :unsure::blink:

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But is this not like using one credit card to pay the debt on another card.

Debt creates crime and in this case it’s the government committing fraud against it’s people.

2% inflation is a joke :D

It's even better, it's like grabbing a crayon and producing "BuyingBear's cheques", you can then use these self-created cheques to pay off the credit card (buy the gilts).

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That seems to me like they are creating money out of thin air (fractional reserve) to buy back debt that was created out of thing air which nullifies the original debt? :unsure::blink:

Except all that debt has already leaked into the economy, be it via the NHS or Prescott's stomach, and of course once you leak £4b the multiplier effect is equivalent to £20b depending on the Keynesian adjustments.

However, buying a few gilt issuances is not a huge move in and of itself, the BoE happily creates money out of thin air all day long as a matter of course :-

http://www.bankofengland.co.uk/statistics/m4/2006/Mar/index.htm' rel="external nofollow">
(excluding the effects of securitisations etc.) increased by £25.5 billion or 1.4%, seasonally adjusted, in March. The twelve-month growth rate rose by 0.7 percentage points to 13.2% in March; this is the highest since September 2004.

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http://www.bankofengland.co.uk/statistics/m4/2006/Mar/index.htm' rel="external nofollow">
(excluding the effects of securitisations etc.) increased by £25.5 billion or 1.4%, seasonally adjusted, in March. The twelve-month growth rate rose by 0.7 percentage points to 13.2% in March; this is the highest since September 2004.

13.2%???? That is really taking the piss.

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It's pretty complicated, but it's to do with the way the Bank transmits its policy interest rate through to financial markets.

Banks need either cash or deposits with the BoE to be able to meet their customers' need for cash and settle inter-bank payments resulting from things like cheque clearing.

The major clearing banks have accounts at the BoE they use to clear across, but at the moment these do not pay interest and are not allowed to go overdrawn, so banks effectively target a zero balance overnight.

This means that at the moment the BoE intervenes to buy, sell or lend sterling to banks that need it several times each day, to make sure that demand and supply for money is balanced, and the policy interest rate prevails in the markets.

Unfortunately, the unpredictability of the system means that the overnight interest rate in sterling markets actually fluctuates quite a bit around the MPC desired target, because there are always forecast errors or because something unexpected happens just before the close of markets.

The BoE is moving to a new system on May 18, where banks will hold much bigger accounts at the central bank, which they get paid interest on and which they can use to smooth out the day-to-day volatility. Instead of targeting a zero balance, they will target a positive balance averaged over the month between MPC meetings. As a consequence, the BoE will also be able to reduce its operations to once a week, instead of several times a day.

Anyway..... the point of all this is that banks need to hold higher balances at the BoE. To do this, the total quantity of base money in the system has to go up quite a bit, but don't worry all you monetarists out there, because none of this extra money will show up in the economy - it will all just sit in accounts at the BoE, so effectively it might as well not exist at all.

And to create the money, the BoE is going to buy quite a few gilts over the next few years. To some extent this is monetizing the government debt, but it is a one-time operation, and as they are being bought from markets rather than direct from the DMO, and given that the amount is only a small proportion of outstanding debt, it shouldn't have much impact on the price of gilts.

Phew.

Thanks for the explanation, Biriyani. But I think this is pumping of money into the economy by the BoE as this will definitely end up in the economy, as the BoE is going to pay interest on this extra balances.

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Thanks for the explanation, Biriyani. But I think this is pumping of money into the economy by the BoE as this will definitely end up in the economy, as the BoE is going to pay interest on this extra balances.

Actually I don't think 'purchasing' the gilts is a huge concern, it's just another small shot of poison that amounts to less than a week's usual money creation.

However there's a risk that their statistical data will not be up to scratch, one can imagine them not being too concerned about the quality of M4 (broad money) releases.

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The BoE is moving to a new system on May 18, where banks will hold much bigger accounts at the central bank, which they get paid interest on and which they can use to smooth out the day-to-day volatility. Instead of targeting a zero balance, they will target a positive balance averaged over the month between MPC meetings. As a consequence, the BoE will also be able to reduce its operations to once a week, instead of several times a day.

Anyway..... the point of all this is that banks need to hold higher balances at the BoE. To do this, the total quantity of base money in the system has to go up quite a bit, but don't worry all you monetarists out there, because none of this extra money will show up in the economy - it will all just sit in accounts at the BoE, so effectively it might as well not exist at all.

Maybe I'm wrong, but my understanding was that central banks do not operate deposit accounts in the way that most people understand.

They hold debt instruments on behalf of the government and member banks.

So the member banks needing to generate higher balances of debt is surely a way of pumping more liquidity into the economy.

All this talk of reform sounds like more smoke and mirrors to me.

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Maybe I'm wrong, but my understanding was that central banks do not operate deposit accounts in the way that most people understand.

They hold debt instruments on behalf of the government and member banks.

So the member banks needing to generate higher balances of debt is surely a way of pumping more liquidity into the economy.

All this talk of reform sounds like more smoke and mirrors to me.

Every day, commercial banks build up huge obligations to each other as a result of transfers between client accounts, BACS payments, cheque clearing etc. They understandably don't want to settle these in cash, so like you or me they instruct their bank to transfer money from their account to that of their creditor.

In the case of small commercial banks, their "bank" is one of the big clearing banks, with whom they have an account. But for the clearing banks themselves, they need to hold an account with the central bank, since this is the only truly liquid and guaranteed place to hold money. So, when Barclays needs to make a payment to HSBC, they instruct the BoE to transfer funds between the two accounts.

During each day banks lend or sell government bonds to the BoE in exchange for sterling, which they put into their account and use to make payments. As I said, at the moment the banks aim to keep the balance in these accounts as low as possible, so they only try to get as much cash as they think they need for that day.

When they make forecast errors, they have to go to money markets to borrow the extra money, and this pushes up the market interest rate above the MPC target.

Under the new system, banks will not be penalised for holding positive balances, since they will receive interest at the same rate as it cost them to borrow the money. The base quantity of money will go up, but none of it will get out into the economy. You can think of it as a merry-go-round on the BoE's balance sheet - on the one hand they lend money to the banks at the repo rate, on the other hand the banks deposit it back and earn interest at the same rate.

The objective of the exercise is not to increase the quantity of money, but to allow banks to smooth fluctuations in their account and keep overnight sterling rates at to the MPC rate.

I have talked about these reforms with some of the top people at the BoE, and believe me, it isn't some smoke and mirror ploy to increase credit in the economy, it's a real and very technical reform aimed at improving the way sterling markets work, and it brings the UK into line with a lot of other countries. Please, give the paranoid suspicion a break every so often.

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13.2%???? That is really taking the piss.

Well, Gordon Brown did, iirc, claim he wanted to see a "wealth creating economy".

Then it all depends on one's definition of "wealth".

It's all only ever illusory, based on trust and belief.

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I have talked about these reforms with some of the top people at the BoE, and believe me, it isn't some smoke and mirror ploy to increase credit in the economy, it's a real and very technical reform aimed at improving the way sterling markets work, and it brings the UK into line with a lot of other countries. Please, give the paranoid suspicion a break every so often.

Thank you, Mr Tucker ;)

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Every day, commercial banks build up huge obligations to each other as a result of transfers between client accounts, BACS payments, cheque clearing etc. They understandably don't want to settle these in cash, so like you or me they instruct their bank to transfer money from their account to that of their creditor.

In the case of small commercial banks, their "bank" is one of the big clearing banks, with whom they have an account. But for the clearing banks themselves, they need to hold an account with the central bank, since this is the only truly liquid and guaranteed place to hold money. So, when Barclays needs to make a payment to HSBC, they instruct the BoE to transfer funds between the two accounts.

....

I have talked about these reforms with some of the top people at the BoE, and believe me, it isn't some smoke and mirror ploy to increase credit in the economy, it's a real and very technical reform aimed at improving the way sterling markets work, and it brings the UK into line with a lot of other countries. Please, give the paranoid suspicion a break every so often.

Thanks for that explanation. I've read through what you wrote a few times.

To be honest I just feel more confused than ever about how the whole system is supposed to function.

The more you learn the more you realise what you don't know I guess.

But I'll take your word for it.

Am I really being paranoid to be suspicious of a quasi-government institution

with the power issue credit out of thin air?

If the bank of england is just another government department why is their

website not a government address?

Just because you're paranoid doesn't mean they're not out to get you.

:ph34r:

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • Even
      • up 2.5%
      • up 5%



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