The Bank of England's gilt-buying has cut the effective maturity of the UK's public debt, implying greater vulnerability of interest costs to changes in market rates. The maturity of liabilities remains longer than in other major countries but the gap has narrowed significantly over the last year.
 
According to the Debt Management Office (DMO) Quarterly Review, the average maturity of conventional gilts outstanding fell to 13.4 years in September 2009 from 14.3 years 12 months earlier. The latest figure, however, is misleading because it includes the £164 billion of gilts now held by the Bank of England's asset purchase facility (APF) – 27% of the total stock.
 
The market has, in effect, exchanged these gilts, with an average maturity of about 10 years, for reserves at the Bank of England, which are repayable on demand. The relevant metric for assessing refinancing risk is the average maturity of the market's combined holdings of gilts and reserves, not that of the entire stock of gilts, including the APF. This is significantly lower, at about 10.7 years (based on a 10-year average life of APF gilts).
 
The Bank of England pays Bank rate on reserves. This results in an interest saving when Bank rate is below the average yield on gilts, as at present. The differential, however, has been positive for about half of the time since the MPC's inception in 1997 and could rise sharply in the event of a loss of market confidence in UK economic policies. This would be instantly reflected in the combined government / Bank interest bill.
 
The DMO figure also does not take into account expansion in the stock of Treasury bills, from £18 billion at the end of 2007 to £52 billion currently. If these are included in the calculation, in addition to adjusting for the APF gilts / reserves swap, the average maturity of liabilities falls further to an estimated 9.8 years. (All these figures exclude index-linked gilts.)
 
This is still significantly longer than for other major countries – the US is at the low end of the range, with an average maturity of publicly-held marketable debt, including bills, of less than four years. The gap, however, is much smaller than a year ago and will continue to erode if the Bank of England extends its gilt-buying programme.