5 FEBRUARY 1977, Page 14

In the City

The amazing rush into gilts

Nicholas Davenport

Do you remember that the Bank of England got into a panic over sterling last autumn and hoisted Bank rate up from 13 per cent to 15 per cent on 7 October? Well, it is depanicking itself so frantically that last week it cut Bank rate again by a whole point to 121 per cent.

Fantastic things are happening in the City where Money is King. I sometimes think that events outside, on which this journal so weightily comments, are mere trivia compared with money events inside the City. The Bank's manipulation of money rates will affect employment, investment, savings and inflation, in other words, your life. Unfortunately there is a dichotomy between the Bank's secret desire to keep money rates high enough to attract foreigners into sterling an'd its professed desire to keep money rates low enough to encourage businessmen to expand and invest. When the Bank got into its panic over sterling in October and pushed Bank rate up to 15 per cent it went on issuing 'tap' stocks to the non-bank public with ridiculously high coupons so that it could bring the money supply down and convince the central banks of the world (if not Professor Friedman) that it was safe to lend us money in support of sterling. But it overplayed its hand. It went on issuing these 'tap' stocks too long. When it had convinced the central bankers and got all the loan money required to back sterling— even with 'a safety net'—it should have stopped making these 'tap' issues, especially the long-dated ones. The overplay came when it made the fantastic issue of £1,250 million Treasury 131 per cent at 96 on 14 January. There has never been such a gigantic issue before. Yet it has already been fully taken up—with the help of some foreign money which has lately been pouring into the market—and is standing at a premium of Now consider the consequences of this gilt-market overplay. In the last seven months the Bank has raised £7,100 million from the non-bank Public and has committed the Government to a total interest payment bill of £13,800 million! Of course, that is much reduced by exacting income tax from the recipients of the interest but it means that all you young men will have to work extra hard for the next fifteen years or so to help pay off these sterling debts— and I am not counting in the $20,000 million debts incurred.

The cost of servicing these high coupon lap' stocks is growing each year at a horrifying rate. The 1976-77 budget accounts put the public sector debt interest charge at £6,500 million—a rise of £1,500 million over that of the previous year—and it will jump to over £7,000 million in 1977-78. What is the use of cutting £2,000 million off public expenditure if you put it back again on to the Exchequer in higher interest bills? And let us not forget that the real cost of servicing this monstrous debt increases as the inflation rate declines. It is perhaps just as well for the Government —but not for us workers and taxpayers— that the inflation rate is expected to rise from 15 per cent in the next few months.

Another unpleasant consequence of the lap' overplay is that by issuing too much stock to the non-bank public the Government is not allowing the money supply to rise fast enough to meet private sector needs. The Chancellor has said that there will be enough to satisfy industry but the recent

release of £360 million of the banks' 'special deposits' at the Bank of England (making a total release of £1,400 million) suggests that money is not as plentiful as it ought to be. I have previously referred to a broker's calculation, which I consider to be accurate, that the Bank has already issued in the current financial year over £2,500 million—now over £3,500 million— more 'tap' stocks than was necessary to keep to the IMF guide lines on DCE (domestic credit expansion) which are £9,000 million for 1976-77 and £7,700 million for 1977-78. Clearly this 'tap' stock overplay must stop. We don't want to attract any more foreign buying of our gilt-edged market. It is 'hot' money which will depart in due course and embarrass the sterling exchange. Mr Healey said in a recent speech that it was the Government's intention to have a slow fall in interest rates in the next few months. But the Government does not control the men of the market who have more realistic views than the politicians. These money men knew that it was impossible to go on issuing long-dated stocks offering yields of over 15 per cent for very long when business in Britain could not survive at borrowing rates up to 19 per cent (except, of course, the money-lending business). Economic stagnation must eventually drive money rates down, and Mr Healey would be wise to let the rate for money come down quickly.

Domestic buying of our still cheaPlooking gilt-edged stocks will be encouraged by the Public Expenditure White Paper published last week which reveals that controls on public spending have at last begun to bite. It is still expressed in 'funny money' (1976 survey prices) but the real volume of public spending for the current financial year will be below the total expected in last year's White Paper. The estimate falls by £1,300 million in 1977-78, compared with 1976-77. So the cash limits imposed have been working. On the new definition of public spending (which excludes servicing that part of the national debt whose interest charges at offset by revenue on other accounts) its share of the GDP at market prices falls froM over 45 per cent in 1975-76 to 424 per cent in 1978-79. But the public bureaucracy is still over-staffed and the social securitY benefit payments go on increasing. If the cuts in public spending had been advertised as 'cutting out waste' they might have had a better reception. The new White Paper on Public ExPend: ture will also encourage Mr Healey to off el a cut in income tax next April. This offer now seems to be a vital part of the negoti; ations with the TUC over the next phase olt the wage restraint social contract. It 0111,,st have dawned on Mr Jones by this time until there is some reflation of demand in t., economy—internal as well as export—newis industrial investment, for which he , always calling, and for which the City r. always ready to provide new money, is Pr_. manly designed to employ fewer worker'