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On the heels of Mervyn King’s warning against further fiscal stimulus comes the UK’s first failed gilt auction in seven years. Are the benefits of the Bank of England’s exceptionally loose monetary policies already being offset by the parlous condition of the UK’s public finances? That bids for the long-dated bonds, due to mature in 2049 and therefore beyond the five to 25-year maturities targeted by quantitative easing, fell short of the £1.75bn wanted is a salutary warning.

Mr King is queasy at the prospect of the Bank and government working at cross-purposes. QE is not exactly going to plan. In fact, in the space of the past fortnight, the Bank’s governor has been forced to watch in dismay as 10-year gilt yields jumped back to 3.29 per cent from their low of 2.95 per cent on March 13, taking them much of the way back to where they were when he announced the QE programme. This is beginning to smack of failure.

For the moment, though, it remains full steam ahead for the Bank’s push to expand the money supply. Indeed, its QE policies entered a new phase on Wednesday with the Bank commencing purchases of what may be as much as £15bn of corporate bonds from an eligible pool of securities of £39bn. Mr King even remains confident, warning on Tuesday that the planned three-month operation to buy £75bn of gilts, bonds and commercial paper could be scaled back “if it works”.

The greater risk, in fact, is that the government contributes to QE’s failure as investors fret about the glut of gilts and the lack of a credible path back to fiscal sustainability. This is dangerous stuff. The worst result would be for the government to hit its debt ceiling and push up gilt yields to such an extent that they crowd out credit to the private sector. That, in turn, could then force the Bank to print more money, in order to buy more bonds, so expanding QE way beyond prudent levels. No wonder Mr King has chosen to speak out

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