The government will borrow an extra £50 billion by the end of August as it continues to raise unprecedented sums to prop up the economy in the fight against the coronavirus.
The Debt Management Office (DMO) revealed its revised financing remit was to raise £275 billion from the market between April and the end of August, up from an initial £225 billion between April and the end of July.
Although the remit has increased, the pace of issuance will slow, suggesting the government believes the cost of the economic rescue is easing. The furlough scheme, which has cost £23 billion alone so far, starts to be wound down from August.
The DMO raised £58.3 billion in April, £62.6 billion in May and £60.3 billion in June. The revised remit means it must raise £93.75 billion in July and August together, or £46.9 billion each month.
The planned gilt sales for the next two months were slightly higher than market expectations and yields on ten-year government debt briefly rose after the announcement before falling back.
Samuel Tombs of Pantheon Macroeconomics, who estimated that the cash requirement for July, August and September would be £139 billion, said: “It is impossible to tell whether the DMO is seeking to overfund while yields are very low, or whether the public finances are worse than widely assumed, or whether the DMO has been instructed to raise money ahead of a large fiscal giveaway in July.”
The scale of borrowing by the DMO since March has never been seen before and the fundraisings will not stop in September. The Office for Budget Responsibility’s projections in May after the Covid shock suggested that the UK financing requirement may be about £380 billion this year, though much will depend on government policy.
The gradual slowdown in the rate of borrowing followed the Bank of England’s decision to increase quantitative easing by £100 billion. Although it will continue buying government debt in the secondary market, the pace of asset purchases will slow dramatically.
In April, May and June, the Bank bought roughly £60 billion a month — matching the volume issued by the DMO. By matching its demand with the government supply of bonds, the Bank had helped to stabilise the market and keep borrowing costs down. From next month the Bank will be buying just under £20 billion a month until December, less than half the rate of issuance.
Mr Tombs said the private sector holdings of gilts would increase as the Bank stepped back and that was likely to ease “some of the intense downward pressure on yields”. In other words, he expected government borrowing costs to start increasing a little.
There has already been some sign that government borrowing costs will rise. The interest rate on longer dated government debt has already crept higher since the Bank announced the decision to slow the rate of QE asset purchases.
Markets are expecting about £412 billion of gilts to be sold this financial year, according to a Bloomberg survey of forecasts. That would mean monthly issuance slows to about £20 billion between September and next March.
The government’s financing remit is higher than its borrowing because the remit includes debt that is maturing and must be refinanced. The budget deficit, or net borrowing, this year is forecast to top £300 billion.
