Gov Borrowing = Int Rate Increases ?

A probability not a certainty.

The hope is that it will benefit the whole economy.

Much new government borrowing is auctioned. The interest rate is determined by what lenders are willing to charge. Supply and demand has an effect on interest rate decisions, as do currency exchange rates and interest rates in other countries.

As you say, there are many factors but the more demand there is for something, the higher the cost.

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"Jane Tweedynn" wrote

If the government offered *you* new bonds at the moment at, say, 6.0%pa interest - would *you* buy them? Yes?

Well what if the current BoE rate was 12%, and you could therefore get an interest rate in a savings account elsewhere of (say) 10%pa? Does the government's offer of 6% look so attractive now??

Of course the rate the government offers is related in some way to BoE rate - if they offer too low (compared to BoE), no-one will take the bonds; if they offer too high, everyone will - but it will cost them too much!!

I'm not aware of the government saying anything about interest rates, the media comment is coming from economists and other independent analysts.

That's rather a non-sequitur. The government are borrowing because they prefer not to raise taxes, any rise in interest rates is a consequence of that and not an object.

The rate for gilts is determined by the market, the government offer gilts at a specified yield but it has to be attractive enough for the market to buy what the government is selling. In general the more they borrow the higher the yield will have to be to get it all to shift. There's also a factor that in the last few years many investors have been scared out of shares and into gilts, so it has been easier to sell gilts. If people start to switch back into shares that's also likely to push gilt yields up.

I suspect you're also not realising that there are many interest rates, depending on the timescale. The BoE rate is just for short-term money, but gilts are generally issued with maturities of many years (up to 30 or so). The yield of a 30-year gilt can be quite different from the short-term rate.

The Americans currently have the luxury of lots of Asian governments buying their debt to stop the dollar falling against their currencies. If that stops (which curiously quite a few Americans seem to want) the yield on Treasuries will have to rise to persuade other investors to buy.

The government Debt Management Office puts tranches of Gilts out to auction. You can see the results of the auctions at

if you follow the link to "Gilts Market". The price realised and hence the yield varies according to market forces and sentiment. That is affected by the Bank Rate and the volume available. The volume is dictated by the value of Gilts coming up for redemption and the Government's need for cash.

On news 24 earlier they had some report about a drop in manufacturing industry expectations etc which they reckoned would stop the boe increasing rates. Can't see anything on the bbc news site though yet.

Presumably this will further feed the horrendous housing boom. (and probably bust)

In message , Tim writes

But Government bonds arent sold at their face value, they are auctioned. So bonds offered today at 6% (say) are discounted over the life span so that the purchase price is increased so that the redemption yield is lower than the running yield.i

Maybe this is it.

Interest rates generally have to rise for the government to offer their gilts dependant upon how much they wish to borrow and how many people subscribe.

I took that increased government borrowing led to an increase in the BoE interest rate, where really there is no relation.

Or maybe there is but I still can't see it because short term and long term interest rates can't become too spread apart for a long period, some pressure somehow must be placed to move the long and short term spread back to its historical average, so for whatever reason maybe the BoE rate does increase on government borrowing?

Every time there is any bad economic news the BBC say it means interest rates won't rise, and vice versa. Since there's a constant stream of fairly random news it doesn't mean a lot. There's also something of an obsession about manufacturing among journalists and politicians, but the fact is that it accounts for less than 20% of GDP and much of it is in a permanent state of decline, so the relevance to interest rate decisions is fairly limited.

If the BoE didn't intervene at all then interest rates right across the time spectrum, from a day to 30 years, would be set by the market, and that includes the market effect of government borrowing. In general you would expect longer time periods to require higher rates, to allow for more risk in the more distant future.

The BoE has an inflation target, and that implies that it has to create new money at some rate - in broad terms the inflation rate is the difference between growth in the money supply and growth in GDP. The new money is injected by the BoE lending in the short term market at a rate below the natural market rate. In principle it could intervene at longer maturities as well but in practice it doesn't. However, as you say there is an indirect effect, because when the market is pricing, say, 5-year gilts it will make a guess as to what the BoE will do over that period. But the market can get it quite wrong, e.g. 15-year gilt yields in, say, 1990 have turned out to be much higher than the average of the short-term rates since then.

"Vice versa"? You mean every time the BBC say interest rates won't rise it means there is bad economic news?

:-)

Unless there's a hidden agenda to try to brake the decline, or even (gasp) reverse it. Journalists and politicians tend to like to incite the odd bit of wishful thinking, no matter how hopelessly overoptimistic.

It isn't what I meant, but it might well be true :)

I dare say people would like to brake the decline, but trying to do it with interest rates is pretty hopeless. Even as far as exchange rates go, I think the view that lower interest rates translate to lower exchange rates is about 15 years out of date, these days most exchange flows are not hot money looking for the best short-term deposit rate.

To see how big the difference between performance in manufacturing and services is, have a look at the first figure here:

You can see that services have had pretty much continuous growth. In many ways it's just as well we switched away from manufacturing in the 80s and

90s, despite the wailing and gnashing of teeth at the time. If we'd started from 50% of GDP in manufacturing instead of 20% it would have been a lot more serious.