Recommendation 14

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