At the start of this month, the gilts market appeared overwhelmed by the burgeoning demands of the UK government. Then the Bank of England sprang to the rescue, announcing that it would spend tens of billions of pounds acquiring government bonds. Gilts surged in response to this news. Economists applauded. Their reactions are mistaken. Quantitative easing, as it is called, poses a grave danger to Britain's creditors. It is a perilous policy that threatens further disruption to the financial system at some future date.
On Thursday March 5, the Bank of England said it would acquire up to ￡75bn of gilts over the following three months. A further ￡75bn of Bank purchases have been earmarked. Relative to the size of the British economy, these are vast sums. The combined figure is roughly three times the stock of notes and coins in circulation and twice the country's monetary base. It is also equal to almost a third of the stock of outstanding gilts. Put another way, the Bank is set to finance the largest peacetime deficit in British history.
Britain's move into quantitative easing has mostly been greeted with cheers in the City. “For holders of gilts, this can only be good news,” commented the head of fixed income research at one broker. Another financial commentator estimated that buying gilts with newly printed money would save British taxpayers some ￡5bn in interest payments.