The country's debt issuance agency is watching the Bank of England's asset-buying programme incredibly carefully to ensure it does not hurt liquidity in the gilts market, the agency's head said in an interview published on Monday.
The British government has been able to borrow at record low levels of interest thanks to the Bank of England's 325 billion pound ($515 billion) bond-buying scheme, markets' faith in the government's commitment to eliminate its deficit and safe-haven flows during the euro zone debt crisis.
But The Daily Telegraph newspaper quoted Robert Stheeman, chief executive of Britain's Debt Management Office (DMO), as saying that his agency was watching the Bank of England's quantitative easing programme closely because of concerns that the scale of intervention could distort gilt prices.
As long as the gilts market remains liquid and efficient, and is able to take down our supply with the minimum amount of disruption to the price formation mechanism, I am happy, Stheeman said.
If we see signs that liquidity in the market is being seriously affected by the bank's purchases, of course we would talk to the bank. We watch their operations incredibly carefully. But so far so good, he was quoted as saying.
The Daily Telegraph said that the Bank of England had taken a large portion of the gilts market out of circulation, reducing supply and potentially hurting investor interest.
Asked whether more QE would risk pushing up the cost of government debt, Stheeman said it could, the report said.
One of the initial consequences of QE was that certain gilts became very illiquid and extremely hard to obtain, he said.
The Bank of England left its QE target unchanged at 325 billion pounds last Thursday, allowing the 50 billion pound tranche of new gilt purchases approved in February to run its course.
Most economists expect the economy to have improved sufficiently by the time of May's rate meeting for the central bank to pause its programme of monetary stimulus.
(Reporting by Adrian Croft; Editing by Ruth Pitchford)