Brexit, How Will You Invest Next 5 Years

short_butt_sweet

Thrugelmir wrote: »

Central banks now control interest rates more generally than Governments i.e. BoJ, BOE, FED, ECB etc.

in the UK, the BoE's "independence" is illusory. the chancellor actually has the power to override the BoE on setting interest rates (this is in the act of parliament which granted the BoE "independence"). he can also replace the governor of the BoE. and so on. in practice, the BoE will follow the general policy which the chancellor wants, and only has limited operational independence about how to implement it.

the ECB is very different, in that there are 19 different governments it could be answerable to - or defy. though it certainly wouldn't defy all 19 of them at once

i'll skip the FED and BoJ for now.

Debt Management Office (in the UK) which manages the Governments cashflow. Sells gilts at auction. Investors determine the price paid and therefore the initial yield. Interest rates obviously need to be pitched at an attractive level. To ensure full subscription.

IMHO, investors actually have very little power here.

e.g. if the DMO is selling a 10-year gilt, they need to offer a rate which pays
1) the expected average bank base rate over the next 10 years
+
2) a premium for being locked in to a fixed rate for 10 years.

the DMO would certainly struggle to get a gilt issue away if they tried to get away without paying a small but positive premium - i.e. if they tried to make to make (2) zero or negative.

however, (1) is entirely a matter of BoE policy (and the BoE's policy is what the chancellor wants it to be: see above).

e.g. if the BoE had a policy of keeping base rate at 1% for the next 10 years, then investors could only expect a small premium to 1% on a 10-year gilt. investors' opinion about whether base rate should really be 1% or something else is irrelevant. since the BoE controls base rate. they get a higher return by buying the gilt than by holding cash, so it makes sense for them to buy it.