Source · Select Committees · Public Accounts Committee
Recommendation 14
14
Accepted
Historically high gilt supply from quantitative tightening creates market absorption and pricing challenges.
Conclusion
We asked the DMO what risks quantitative tightening will create for government borrowing. The DMO told us that in 2023–24, the net supply of gilts was “at a historical high”, which was a challenge for the market in terms of absorbing the higher supply and establishing the “right price”.22 The Treasury added that quantitative tightening increased the supply of gilts, which pushed down prices, so increasing yields and interest rates (there is an inverse relationship between gilt prices and yields).23 The DMO explained that the main challenge it faced was to make sure its operations continued as “effectively as possible”. It told us that this required on-going communication with the Bank of England “very explicitly” about co-ordinating gilt sales to ensure similar gilts were not being sold simultaneously.24 We asked whether there would be any direct competition between the DMO and the Bank of England when selling gilts. The DMO told us that it tried to avoid this, but it would be difficult to rule it out in the future depending on how much the Bank of England might choose to sell. The DMO added that it has first mover advantage because 19 C&AG’s Report, paras 2.5, 2.8, 2.13–14, 3.14 and 3.17 20 C&AG Report, para 3.18 21 HM Treasury, Autumn Statement 2023, November 2023 22 Q 47 23 Q 43 24 Q 47 Managing government borrowing 13 it designed its annual auction calendar first, before sharing and discussing with the Bank of England. The OBR told us that there had “not been a lot of disruption in terms of the volume and stability of the gilt markets” as a result of quantitative tightening.25
Government Response Summary
The government claims the recommendation is already implemented, citing ongoing initiatives like the Professionalising Crisis Management project, the annual DMO remit setting process, and NS&I's transformation programme as existing efforts to improve preparedness and learn lessons from past crises.
Government Response
Accepted
HM Government
Accepted
5.1 The government agrees with the Committee’s recommendation. Recommendation implemented 5.2 Previous crisis episodes placed extraordinary demands on the government and capturing lessons learned have helped to improve its preparedness. 5.3 Following the Review of HM Treasury's management response to the financial crisis, the Professionalising Crisis Management project was established to ensure the department is ready to effectively respond to future financial stability events. It has expanded considerably since, and the department has developed a suite of manuals and resources to support the deployment of tools in crises. 5.4 More recently, the COVID-19 pandemic posed an unprecedented challenge that required the government to revise its financing requirement outside of the normal cycle. As discussed in the government's response to recommendation 4b of the Committee's Ninth Report of Session 2023-24, HMT remains committed to learning and sharing lessons from the response to the pandemic. In respect to borrowing, HMT has since agreed with the Office for Budget Responsibility (OBR) that it will consult the OBR on any future out-of-cycle internal fiscal projections (that, for example, might be used to inform a DMO financing update). In light of market challenges at the time, there was also an increase in the planned DMO end-financial year net cash position, to provide additional day-to-day liquidity. 5.5 Generally, setting the DMO’s remit each year involves taking into account the market’s feedback to design a programme that best meets the debt management objective. This serves as an annual lessons learned process, which remained robust during the pandemic. 5.6 NS&I’s funding target was also increased materially at the time. NS&I met this by maintaining high rates on easy access variable products, which led to very high demand for their products and services. When these rates fell, customers moved quickly to withdraw funds creating further operational pressures, which, regrettably, negatively impacted customers experiences and public trust in NS&I. 5.7 The operational pressures from both high inflows and subsequent outflows were exacerbated by NS&I’s older systems. NS&I’s transformation programme will deliver the systems scalability needed to meet sudden spikes in demand and the robustness customer ‘journeys’ that enable customers to complete these online without further support.