* DMO head Stheeman says BoE inflation target clearly restated
* Acknowledges strong demand for inflation-linked bonds
By Olesya Dmitracova
LONDON, March 20 (Reuters) - Investors in British government bonds will welcome confirmation of the Bank of England’s inflation target in its new mandate released on Wednesday, the country’s chief debt issuer said.
“The inflation target of 2 percent has been clearly restated and I think that restating of the target is really what gives the market some confidence,” Debt Management Office chief executive Robert Stheeman told Reuters in an interview.
But he acknowledged strong demand for inflation-linked gilts, which analysts say has been boosted by investors’ desire to protect returns from potentially high British inflation in coming years.
Stheeman said it was unlikely the BoE’s new remit took the gilt market by surprise.
“I don’t think it means anything dramatically new for gilt investors,” he said.
In his annual budget statement, finance minister George Osborne said that, while the central bank should continue to target annual inflation at 2 percent, low and stable price growth was not enough for prosperity.
The new mandate for the BoE he announced also recognised the potential need for further “unconventional monetary policy instruments”, such as the massive gilt purchases it has already undertaken to support the economy.
Investors had expected changes to the BoE remit that would give it more flexibility in controlling inflation and focus it more firmly on economic growth, with demand for inflation-linked gilts driving real yields to record lows in the past two weeks.
Partly as a result of greater appetite, on Wednesday the DMO raised the proportion of linkers it will issue in the 2013/14 fiscal year to 23.7 percent of total gilt sales from 21.8 percent in 2012/13.
The changes to the BoE remit reinforced investors’ concerns about inflation, said Sam Hill, fixed-income strategist at Royal Bank of Canada.
“It validates the view that inflation will stay above target for a while,” he said.
Stheeman said issuing more linkers “represents good value for money for the government”.
“We constantly hear that there is very strong demand for index-linked gilts, which makes long-dated maturities in particular cost-effective relative to conventionals.”
Contrary to forecasts in a Reuters poll, the DMO slightly cut the share of medium-dated gilts - where liquidity has been drained the most by BoE purchases - in its 2013/14 issuance programme.
“We also have the mini-tender programme which is going to be larger this year than last year and which could, if necessary, facilitate additional supply in this or any other part of the curve,” Stheeman said. (Additional reporting by Christina Fincher; Editing by John Stonestreet)