The Bank of England has estimated it will require the Treasury to transfer a total of £150bn by 2033 to cover expected losses on the central bank’s quantitative easing programme, up from a previous calculation of £100bn.
The transfers represent both the continuing cash flow losses on the QE scheme — under which the BoE bought large volumes of gilts — as well as gains or losses made by the central bank when bonds mature or it sells the assets. Early profits on the scheme were expected to turn into losses when interest rates rose, but the estimated cost to UK taxpayers over the life of the programme has climbed over the past year as monetary policy was tightened sharply.
The BoE published its latest estimate for transfers from the Treasury to cover losses on its asset purchase facility — which houses its holdings of bonds bought under QE — on Tuesday. Jagjit Chadha, director of the National Institute of Economic and Social Research, a think-tank, said it was “increasingly clear” that losses on the BoE QE scheme would act as a constraint on fiscal policy in any pre-election Budget as they were now larger than the UK fiscal watchdog had factored into its forecasts.
The BoE began using QE in response to the global financial crisis, amassing bond holdings of £895bn between 2009 and 2022 in order to boost the economy when interest rates were already at record lows. It began unwinding these holdings last year, at first by stopping reinvestments of maturing assets, and since October by selling bonds at a predicted pace of about £80bn a year.
The BoE is indemnified against losses on the QE programme under an agreement signed with the Treasury in 2009, intended to ensure that monetary policy is not constrained by the implications for the central bank’s balance sheet.
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Dave Ramsden, the BoE’s deputy governor for markets and banking, said earlier this month it was important that rate-setters do not “take into account financial risk or profit when taking monetary policy decisions”, including when it came to the central bank’s gilt portfolio.
However, the transfers between the BoE and Treasury have consequences for taxpayers. In forecasts published at the March Budget, the Office for Budget Responsibility estimated that losses over the remaining life of the QE scheme would result in a cumulative net loss of £63bn.
This estimate was based on market pricing for the path of interest rates in early February when investors were expecting the BoE to win its battle against high inflation more easily than has proved to be the case. By April, the BoE was predicting losses could eventually top £100bn. Its latest estimates, set out in a quarterly report about the asset purchase facility, show net transfers from the Treasury could total more than £150bn by 2033 to cover losses if interest rates follow the higher path priced into markets at the end of June, peaking near 6 per cent.
In the short term, the BoE expects the Treasury to transfer about £40bn in each of 2023, 2024 and 2025. This is equivalent to about 4 per cent of gross domestic product, and about £10bn more each year than the BoE was anticipating in April, suggesting the government will face additional pressures on the public finances in the run-up to the next election.
The BoE underlined that its latest estimate was highly sensitive to the underlying assumptions on interest rates and the pace of asset sales.
However, even in a “soft landing” scenario where interest rates fell gradually over the next three years, losses over the lifetime of the QE programme would still exceed £100bn. The OBR has emphasised that the cash flows associated with QE and its reversal are not the same thing as an assessment of the programme’s overall fiscal impact, since it supported the economy and financial markets over a long period.
Source: Financial Times