It is a little-known fact that even the UK government has an overdraft facility.
It’s called the Ways and Means Facility and it resides at the Bank of England.
Ordinarily, the government would finance its borrowings either by selling gilts – UK government IOUs – or by raising money from savers via National Savings & Investments.
Anyone who buys a premium bond is, effectively, loaning money to the government.
However, there are times when the government needs to bypass the sterling money markets or gilt markets , as is the case at present.
Accordingly, the Treasury and the Bank of England announced today that if necessary, the facility would be extended.
Typically, the facility stands at £ m, as it has since April
It can, though, be increased rapidly should the government need cash urgently on a short-term basis to meet its outgoings.
At the height of the financial crisis, from the end of December (to February) , it shot up to £ . 9bn.
Disclosure today that the Facility could be extended, if necessary, has raised eyebrows because the Bank of England is owned by the government.
It will raise concerns that the Bank of England is engaging in so -called ‘debt monetization’ or ‘monetary financing’, in other words, effectively printing money to pay the government debts.
This is something that is synonymous with the hyper-inflation suffered by Germany during the s or, more recently, in Zimbabwe.
The move has also caused surprise in some quarters because the new governor of the Bank, Andrew Bailey, said only last month in a phone call with reporters that the facility was just a “historical feature”.
He followed that up with an article for the Financial Times, earlier this week, in which he was at pains to stress that the Bank was not engaging in ‘monetary financing’.
He wrote: “Using monetary financing would damage credibility on controlling inflation by eroding operational independence.
” It would also ultimately result in an unsustainable central bank balance sheet and is incompatible with the pursuit of an inflation target by an independent central bank.
“But the UK’s institutional safeguards rule out this approach .
So does today’s news represent a u-turn?
Has the Chancellor, Rishi Sunak, suddenly turned into Robert Mugabe?
The answer is no.
If markets thought otherwise, news that the facility may be extended would have been greeted by a big sell-off in the pound, which instead remained more or less unchanged.
The lack of panic is because both the Treasury and the Bank have stressed Today that the move is merely a short-term expedient – a way around the fact that, during the next few weeks, the government spending requirements may become so great that it would not be possible to raise the sums it needs via the gilt and sterling money markets without causing disruption to them.
This measure will prevent any instability.
As Allan Monks, economist at JP Morgan Securities, put it: “The Ways and Means facility extension will almost certainly be temporary – it is essentially dealing with a bottleneck in t he gilt market – and so it is hard to view this facility as doing anything other than ensuring that the government is able to deliver the emergency support it has promised in the most timely and cost effective way. “
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