Commentary: No need to panic on gilts

A small sigh of relief yesterday in the gilts market as the Bank of England disclosed that the next gilts auction, due on 27 January, will be pounds 2.5bn and will not be stepped up to pounds 3bn. But it is rather pointless to worry about pounds 0.5bn here or there, when from April the Government will need to raise pounds 1bn a week.

This means persuading institutions to raise their gilts holdings by 70 per cent and foreigners to increase theirs by 60 per cent, NatWest Markets estimates. The funding figures are so high that all sorts of frightening scenarios of the need for plunging gilts prices (knocking shares) or a falling pound are being put forward to persuade the markets to buy the stock.

But do not panic. In the short term, the Bank has announced enough issues virtually to cover the 1992/3 funding requirement, and in cash terms will have raked in all but about pounds 3bn when next week's auction is paid up. (The precise amount is hard to estimate even for the Bank since it varies with movements in the reserves.)

The Bank has been able to keep up so well this year because Black Wednesday's foreign exchange intervention counted as funding. The Bank still has a good chance of getting next year off to a flying start by funding at least some modest part before April.

There is also a simple safety valve, which is to abandon full funding and underfund the borrowing requirement for a while, making up later as the economic cycle improves. Reams of paper have been wasted recently on the finer theoretical points of underfunding and monetary policy. The simple answer if the strains get too severe is just to go ahead and do it.