Here’s why it matters that the Bank of England is buying another £100bn of government debt

It’s far from clear that there was any danger of a crisis in the UK government bond market. But the bank’s purchasing programme provides some useful insurance against it

The bank is no outlier – it’s doing pretty much the same as other big central banks such as the Federal Reserve and the European Central Bank (Reuters)

As the saying goes: “A billion here, a billion there – soon you’re talking serious money.”

How about hundreds of billions?

The Bank of England’s Monetary Policy Committee has voted to increase its asset purchase scheme by another £100bn. This comes on top of the £200bn it committed to purchasing earlier in the year.

What does that mean?

The first thing to note is that the bank will now be purchasing £300bn of UK government bonds in 2020.

That’s roughly equivalent to the projected deficit of the UK government in the current financial year to pay for all its emergency coronavirus-related spending, including the jobs furlough scheme.

It’s not quite correct to say that the bank is funding the state’s spiralling deficit during this crisis.

The projected public-sector net cash requirement is actually more than £400bn and private investors will have to buy the debt first and then sell to the bank.

Yet it’s abundantly clear to everyone in the financial markets that the bank is acting as an effective backstop for government’s borrowing.

Does that matter?

It certainly matters for UK government bond investors.

They know they can be confident that when they buy UK government bonds – known as gilts – from the Debt Management Office they will be able to sell them on to the bank.

That removes any fear that they will be stuck holding bonds that no one else wants to buy.

This should stabilise the market for UK government debt, meaning that it can continue to borrow to support millions of ordinary British workers and businesses.

It’s far from clear that there was any danger of a crisis in the UK government bond market. But the bank’s purchasing programme provides some useful insurance against it.

Will it help the economy directly? The bank says the asset purchases should help support demand – or spending – in the economy. The evidence here is somewhat mixed. It’s plausible that purchases helped do that in the immediate wake of the financial crisis. But the power of successive rounds of asset purchases to support demand directly seemed to weaken.

And it’s also unclear how beneficial a stimulus to spending will be when people are still in the midst of a public health crisis.

What about the dangers?

The usual objection to bank bond purchases over the past decade has been that they will set off an inflationary cataclysm, debasing the currency.

Those objections have been rather muted, though, in this crisis. In part that’s because previous warnings of an inflationary spiral proved unwarranted.

It’s also because the Bank is no outlier; it’s doing pretty much the same as other big central banks such as the Federal Reserve and the European Central Bank. The Fed has effectively promised unlimited bond purchases in this crisis.

£100bn is serious money in anyone’s book. But the reality is that, in the world of central banking in the era of Covid-19, it’s nothing particularly special.