MNI EXCLUSIVE: No Fiscal Boost From UK Treasury/BOE TFS Move

--TFS Helps Drive Effective Lower Bound Close To 0%, Impact Hard To Measure

By David Robinson

     LONDON (MNI) - The announcement that the Bank of England (BOE) is taking

control of the Term Funding Scheme (TFS) -- shifting the risks associated with

the stg126 billion loans onto its balance sheet -- enhances BOE control over

policy transmission, but public finance experts told Market News that it should

not bolster the government's books.

     They foresaw no benefit to the key public sector debt and borrowing

measures from the Treasury's move to stop indemnifying the TFS, which provides

banks with funds at close to the policy rate, while providing the BOE with a

stg1.2 billion capital injection to strengthen its balance sheet.

     Statistics officials have yet to decide how the shift will be treated, but

as the transfer of the TFS only involves two public institutions -- the Treasury

and the central bank -- it should not impact aggregate public finance measures.

     "This will change the risk profile between central government and the Bank,

but shouldn't have any impact on the total public sector balance sheet," Martin

Wheatcroft, a government finance specialist, stated.

     --NO NET DEBT IMPACT

     Wheatcroft said that as the capital injection is an intra-government

transaction it will "not affect the overall position shown in public sector net

debt, but will result in a relatively small increase in central government (and

hence general government) net debt."

     This view was cautiously supported by Fraser Munro, who is responsible for

public finances data at the UK's Office for National Statistics.

     "We haven't had the opportunity to finalise any implications and plans as

yet, though it would seem to me that at a public sector level there should be no

changes resulting from moving TFS onto the BoE balance sheet," Munro stated.

     How to treat the transfer of the TFS will be formally discussed at an

upcoming official statistics classifications meeting.

     "Intuitively, I would agree that there will be an increase in central

government (and general) net debt equivalent to the size of the capital

injection, which in turn would be offset by an equal and opposite impact on the

BoE's contribution to net debt; with no resulting change at a public sector

level," Munro said.

     In theory, the Bank, rather than the Treasury, would be on the hook if the

banks were unable to repay the TFS loans.

     Wheatcroft noted, however, that as the TFS recipients include high street

banks, "there would be more to worry about than whether TFS loans were repaid or

not," if these ran into trouble.

     --ELB CLOSE TO ZERO

     At its June meeting, the BOE's Monetary Policy Committee announced that it

was likely to start unwinding quantitative easing when the Bank Rate was raised

to 1.5%, rather than 2.0%. This is because it estimates that the effective lower

bound (ELB) -- a level below which monetary easing is no longer considered to be

stimulative -- is lower than previously thought, giving it more room to cut the

Bank Rate in a downturn.

     The TFS, which supports bank lending at ultra-low rates, should push down

on the ELB -- and the Bank now has full control over it.

     BOE Chief Economist Andrew Haldane, however, said that it was not possible

to isolate the TFS effect on the ELB when questioned about it by Market News

following his speech on Thursday.

     "We thought the effective bound was a half (0.5%). Now, partly because the

financial sector is stronger, we think it should be lower than that -- close to

zero," Haldane said.

     "Saying how much is (due to) this and how much is that, it is giving

spurious precision to do that. I certainly couldn't (do that)," Haldane added.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

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