The Bank of England will directly finance the extra spending needs of the UK government on a temporary basis, the government announced on Thursday, allowing the Treasury to bypass the bond market.
The move highlights the extraordinary demands on cash the government has experienced in recent weeks, which it feels it cannot finance immediately in the gilts market.
In a statement to financial markets, the government announced it would extend the size of the government’s bank account at the central bank, known historically as the “Ways and Means Facility,” which normally stands at just £400m.
This will rise to an undisclosed amount, allowing ministers to spend more in the short term without having to tap the gilts market. In 2008, a similar move saw the Ways and Means Facility rise briefly to £20bn.
This direct monetary financing of government would be “temporary and short-term”, the Treasury said in a statement.
“As well as temporarily smoothing government cash flows, the W & M Facility supports market function by minimising the immediate impact of raising additional funding in gilt and sterling money markets,” it added.
It said any drawings on this overdraft would be repaid as soon as possible before the end of the year.
Less than a month ago, the Bank of England said there was little chance there would be any need to use the Ways and Means Facility, demonstrating just how much government finances have been stressed in the weeks since.
In a call with journalists on 18 March, Andrew Bailey, BoE governor, said the facility was just a “historical feature”.
“I don’t think at the moment we’re facing an inability of the government to fund himself, so, yes, it’s there, but it’s not a frontline tool,” Mr Bailey had said.
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