BoE Bets on Inflation but Talks Up Deflation

A note doing the rounds here in London points to a very smart move by the Bank of England's pension fund.

Robert Winterton of Landesbank Baden-Wuerttemberg notes a 12% gain in the Bank's pension fund between Mar. 2007 and Mar. 2008 – the latest figures revealed by Freedom of Information filings – thanks to "great market timing.

"The fund sold out of equities entirely, cutting a 21.6% holding down to 0.1% and thus avoiding a 35% drop in UK equities."

And as it quit the stock market, the BoE's pension fund grew its holding of inflation-protected, index-linked gilts up from 25.6% of assets to nearly 71%.

"You buy them if you are worried about inflation," notes Winterton. "They are a hedge against inflation."

Contrast this pension committee decision with the anti-inflation decisions made by the Bank of England's monetary policy team.

In the year to March 2008, the Bank of England raised and then cut interest rates – forecasting "broadly balanced risks" to inflation.

It's since slashed interest rates to a series of all-time record lows, hitting 0.5% in March 2009, and creating £150 billion in monetary reserves to buy government bonds as part of its fight against inflation's evil twin – the falling prices of deflation.

We shan't know quite how the BoE has since positioned its own pension investments until the next release in August this year. And we're very unlikely, BullionVault guesses, to see the Old Lady buying gold for inflation defense.

But with an extra £150 billion joining the chase of government bond yields in the Bank's fight against "deflation", UK investors might want to consider hedging their own pension savings against inflation as well.

After all, "The Bank of England pension fund is managed on behalf of a very select and savvy group of people with access to a lot of market insight," as Winterton notes – "the employees of the central bank."