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BOE Warns Taxpayer Faces £100 Billion Net Losses on QE Program - BLOOMBERG

APRIL 28, 2023

(Bloomberg) -- The Treasury will transfer £30 billion ($37.4 billion) to the Bank of England this year to cover losses made on its quantitative easing portfolio, the central bank estimated.

Over its lifetime, QE will cost the taxpayer at least £100 billion in what threatens to become a massive drain on the government’s resources, the central bank projected it its latest asset purchase facility quarterly report.

BOE Governor Andrew Bailey detailed the arrangements in a letter to Chancellor of the Exchequer Jeremy Hunt released Friday.

“The total future path of cash flows will continue to be highly dependent on the path of market interest rates, and on the MPC’s desired path for unwinding the assets held,” Bailey wrote in the letter. Our officials monitor the operational processes governing these cash flows closely, and will continue to do so.”

Hunt confirmed the government will indemnify the BOE for any losses it has under an agreement established when QE started.

“Any future cash transfers will be handled under the terms of the indemnity as has been the case to date,” Hunt wrote to Bailey.

The forecast is based on the current market path for rates and with current rates at 4.25%. The outlook could be about £60 billion worse if rates are permanently 1 percentage point higher than expected.

The estimates relate to the QE stimulus program launched in 2009 after the global financial crisis. It was aimed at keeping a lid on market interest rates after the BOE slashed its benchmark lending rate to the effective lower limit of 0.5%. Under QE, the BOE created new money to buy bonds from investors.

A second huge round was launched in the pandemic, taking the size of the whole program of asset purchases to £895 billion — £875 billion of gilts and £20 billion of corporate bonds.

The BOE is now running the portfolio down. Gilt holdings have been lowered to £815 billion and corporate bonds to just £6 billion.

However, higher interest rates have turned QE into financial burden. The BOE pays interest to commercial banks at the prevailing rate, currently 4.25%, on the reserves created to buy the bonds. It earns a fixed income from those bonds.

Between 2009 and 2022, the portfolio made a £123 billion cumulative profit as bond income was greater than the cost of the reserves. The dynamic has now reversed and the portfolio is a drain on the Treasury.

On the current market path for rates, the portfolio will be carrying a net lifetime loss by 2028, the BOE projects. By 2033, it will have cost the taxpayer £100 billion – money that might otherwise have been spent on hospitals or schools.

Even if interest rates return to pre-pandemic estimates of where they will settle, lifetime losses on the portfolio will be close to £50 billion, the BOE estimates.

Prime Minister Rishi Sunak has expressed concern about the high cost of servicing the national debt, part of which is a result of the QE arrangement. 

Some economists have called for interest payments on some of the reserves to be cancelled to end what are effectively taxpayer payments to commercial banks, via the BOE.  

The BOE has stressed that the policy should be judged not on the fiscal cost alone, but by how many jobs it saved in protecting the economy from an even worse outcome.


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