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While today’s decision by the Bank of England MPC was literally a no brainer it does not help the thousands of home owners who are struggling to make ends meet. As we read another report from the...
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Saturday 24th May 2008
While the situation with regards to rising national debt has already been covered in the popular press there are some issues which may have escaped the notice of observers. The recent rise in the rate of inflation has led to further falls in the GILT market, the market where the government raise their finance for the budget and other requirements. The authorities are now looking at the double whammy of rising national debt and rising debt finance costs.
The rise in inflation has brought down the ‘real return’ on GILTS which is the difference between the interest rate paid on the bonds and the rate of inflation. As inflation rises, so the real rate of return falls and investors have been selling GILTS lower. This means that where for example a 6% interest rate on a GILT and 3% inflation would have seen a real return of 3%, this is now not the case.
In order to deliver a 3% real return with inflation nearing 4% the authorities would need to pay a rate of 7% interest on their debt instruments. While a 1% rise may not seem an awful lot, can you imagine the increased cost when there are literally billions of pounds at stake. The economic straight jacket is tightening around Gordon Brown. |
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