MNI POLICY: Bailey Says BOE Smoothing Government Debt Profile

-Bailey Says Hard To See How Debt Can Be Inflated Away: CPI Heads To Zero

-No Tight Monetary Financing Definition; Not Contemplating Negative Rates

By David Robinson

     LONDON (MNI) - Bank of England Governor Andrew Bailey downplayed the debate

over whether the BOE was engaged in monetary financing, but acknowledged that it

was helping smooth government borrowing.

     In a broadcast interview at a Financial Times event, Bailey was dismissive

of the idea that debt could be inflated away, with the Bank continuing to pay

interest on reserves rather than providing free funding and with the outlook for

low inflation.

     Following are key points from Bailey's question and answer session:

     -Asked if the Bank was carrying out monetary financing Bailey said "There

isn't really a subtle definition of monetary financing."

     Monetary financing under classical definitions, including inflating away

debt, "was not going on at all."

     "This whole idea of inflating away (debt) is hard to imagine in a world

where we are paying interest on reserves, as we are," he said, although he added

"Does it make sense for us to do this in terms of what I call smoothing the

profile of overall government borrowing and the impact that might have on

financial markets? Yes."

     -At its current pace the BOE will complete its GBP200 billion of asset

purchases next month and there is a widespread expectation it will raise its QE

ceiling at next month's meeting.

     When the Bank launched the programme in March "We were very clear we were

operating at pace, and we are buying gilts, give or take, at GBP50 to 60 billion

of assets a month, which is the fastest the Bank has done," he said.

     -Bailey said it was clear that the surge in gilt issuance "was going to

strain the capacity of the markets in the short-term and we knew that we had to

play a role both in terms of stabilising the markets .. and enabling the shock

through the issuance of government debt to be absorbed."

     -He denied the Bank was taking a risk with inflation, saying that its

latest economic scenario "had inflation dropping to zero .. and it then just

about comes back to target by the end of the horizon."

     -Asked if the Bank could sanction negative interest rates, Bailey said it

would be foolish to rule anything out, but it was not something they were

contemplating at present. He said that setting negative rates was not something

that could be done at short notice.

     "My own view is that it would require, if we were to consider it, quite an

extensive communications exercise because I don't think it is just a linear move

in interest rates .. I think from a communications point of view .. it is a very

big step," he said.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$,M$$BE$]