The Bank of England (BoE) is to hand the Treasury the interest it receives on its QE asset purchases, a move that reduces pressure on Chancellor George Osborne ahead of the Autumn Statement.
The BoE has purchased £375bn in gilts via its quantitative easing (QE) programme and will now hand the interest on those purchases (expected to reach £35bn by March 2013) to the Treasury on a regular basis.
Gilts rallied on the news, in the expectation the extra income will make future government borrowing requirements slightly lower than previous estimates.
Ten-year gilt yields fell to from 1.77% to 1.67% on the news, the lowest level since 5 October, before easing back to 1.72% by mid-afternoon.
Monument Securities' Marc Ostwald said the deal reduces pressure on the Chancellor to find more revenue or cut spending further in the Autumn Statement on 5 December, but warned expectations of reduced gilt issuance in future are "rather too simplistic".
In a letter to the Chancellor discussing the move, Bank governor Mervyn King noted the Treasury would eventually have to pay back the interest once the monetary policy environment changes.
"It is likely to lead to the need for reverse payments from the government to the APF in the future as the Bank rate increases and the APF's gilt holdings are unwound by the MPC," King said.
Ostwald said this would lead to increased gilt issuance in future years.
"The words 'smoke and mirrors' are thus an appropriate epithet for this exercise, and we would note that when the Treasury has to borrow that money, gilt yields will almost certainly be much, much higher," he said.
Threadneedle head of multi-asset Toby Nangle, who recently proposed just such a transfer of QE profits, said the announcement was not a cause for concern.
"These coupons are not part of the QE programme and it was made clear at the start of QE that they would always be the property of the Treasury," he said.
The interest had previously been sitting unused in the Bank of England's Asset Purchase Facility (APF) account. The move will bring the UK in line with practices seen in the US and Japan as part of those countries' respective QE programmes.
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