Former Chancellor Kwasi Kwarteng was told his mini-budget could drive up borrowing costs, the head of the Debt Management Office has revealed.
Sir Robert Stheeman told the Finance Committee that officials from his department “have been in close contact with colleagues and Treasury officials” in the run-up to the September 23 statement, warning that this “is likely to result in higher borrowing costs”.
Markets had expected the government to borrow between £10bn and £15bn for the financial report, Sir Robert said, but the real figure turned out to be £72bn.
“We were informed by the Treasury Department about a week in advance that the number would be significantly larger,” the DMO chief told MPs.
“Our role ultimately is to advise ministers on how best to frame the mandate based on the number we are asked to collect. And of course that includes advice on market conditions.”
While Sir Robert said officials had told Treasury officials that borrowing costs were likely to rise, he admitted he was surprised by the level of market reaction to the statement.
“I would like to say that it was a surprise. And I would guess that it came as a surprise to virtually every market participant as well. Because otherwise every market participant could have made quite a lot of money because they would know exactly what is going to happen.”
Government borrowing costs have eased from recent highs after Kwarteng’s successor at the Treasury, Jeremy Hunt, reversed nearly all mini-budget policies.
However, Sir Robert said the government’s borrowing costs could rise again as a result of the Bank of England’s quantitative tightening programme, causing it to flood the market with billions of pounds of gilts bought during the financial and Covid crises as it tries , their balance decrease sheet metal.
“We now have a situation where the net issuance to the market will be the highest in history,” he said.
“As it usually plays out, you would expect it to be a matter of supply and demand. And if there is a lot of supply, then theoretically the price must fall and yields must potentially rise.”
Even so, markets now have much more confidence in the government than they did a few weeks ago and concerns about the credibility of UK institutions have largely receded, he said.
Sir Robert also said he was “very confident” that the DMO could easily sell the UK’s debt, although there could be “some bumps along the way”.
Sir Robert said uncertainty surrounding the energy price guarantee had contributed to the turmoil. Liz Truss originally announced untargeted support for businesses and households for two years, leaving the government at the mercy of global gas prices for 24 months.
The World Bank warned Thursday that it would be too expensive for governments to help everyone with rising energy bills.
David Malpass, the bank’s president, told the BBC: “Governments say we’re going to take care of everyone, which is just too expensive.”
The Covid support programs have not been well targeted and it will take decades to pay off the debt, said Mr Malpass, adding that the same approach is being taken to deal with the energy crisis.
https://www.telegraph.co.uk/business/2022/10/26/markets-ftse-100-live-news-pound-dollar-bonds-gilts/ We warned Kwarteng about mini-Budget, says top civil servant