Treasury fears £200bn cost of unwinding Bank QE crisis scheme
THE Treasury has asked Parliament to authorise up to £200bn to cover losses from the Bank of England’s moneyprinting programme, as MPs warned that taxpayers were on the hook for an “avoidable” bill.
Officials have asked for approval to spend an additional £180bn covering losses on the Bank’s so-called quantitative easing (QE) programme.
Under a historic deal struck when QE was first launched in response to the financial crisis, the Government agreed to cover any losses suffered by the Bank on bonds it bought to help support the economy. The annual provision of this arrangement has soared from a previous figure of just £20bn, drawn up less than 12 months ago. The huge jump reflects the fact that rising interest rates have reduced the value of bonds bought by the Bank during Covid and the financial crisis to keep the economy afloat.
Losses are realised because QE created reserves held by commercial lenders in the form of deposits.
Threadneedle Street pays interest on those reserves at the current Bank of England base rate. When interest rates were at record lows, the cost of paying interest was more than covered by the money earned on government bonds.
Now interest rates have climbed to 4pc, which is above the average interest rate earned on gilt holdings, the Bank is paying out more on QE deposits than it earns from bonds. The Treasury must step in and cover the difference.
The Treasury began bailing out the Bank for losses suffered from QE for the first time last November with a payment of £828m. A second payment of £4.2bn was made last month, according to the Office for National Statistics.
Officials at both the Bank and Treasury have cautioned that the £200bn figure is “highly sensitive” to market interest rates and how quickly bonds are sold.
The Bank has built up a huge £823bn portfolio of government debt after massive rounds of bond buying during the financial crisis and the pandemic, which were aimed at stabilising the economy by lowering borrowing costs.
Last November, the Bank started selling government gilts back to investors in a bid to shrink its huge balance sheet. Policymakers have authorised sales of up to £80bn over the coming year. The Bank’s latest estimates suggest the Treasury will be forced to transfer more than £230bn to the central bank’s asset purchase facility over the next decade to cover projected losses on its bondbuying programme.
The Office for Budget Responsibility has already warned that unwinding QE will lead to much bigger losses for the taxpayer than the previous 13 years of gains, in which the Bank’s bond-buying programme sent £123.8bn to the Treasury. Although the unwinding of QE does not directly add to the headline measure of public borrowing, it will add billions of pounds to the debt mountain.
Sir John Redwood, the Conservative MP and former head of Margaret Thatcher’s policy unit, urged the Bank to keep hold of more of the bonds on its balance sheet to maturity.
“This could definitely avoid a bigger loss for the taxpayer,” he said. “If you go wading into the market now and sell these bonds before they fall due for repayment, mostly they will incur a very big loss and certainly a bigger loss than if you held them to redemption.”
A Treasury spokesman said the change in provision recorded in parliament had “no impact on the Government’s fiscal position”. The spokesman added: “The actual amounts paid out depend on market conditions at the time, and this technical adjustment does not necessarily mean this will cost more than expected.”