Bank of England Bond Sales Set to Impact Treasury Finances by 2029

The Treasury is preparing to cover almost £5 billion in losses made by the Bank of England by the end of the decade as a result of its ongoing gilt selling programme. Latest calculations indicate that these anticipated losses, stemming from the Bank’s quantitative tightening initiative, will significantly erode the government’s fiscal headroom ahead of the next budget cycle.

This bond sell off follows a period when the Bank purchased gilts at higher prices during quantitative easing, notably after the financial crisis and the pandemic. The value of these bonds has since declined, resulting in substantial losses when they are sold back to investors. These losses are projected to reach £4.8 billion in the 2029 to 2030 fiscal year, which is considerably higher than earlier estimates released by the Office for Budget Responsibility.

The increase in losses is partly attributed to changes in the pace of the Bank’s gilt sales earlier in the year. The Bank is also obligated to pay commercial banks the full rate of interest on reserves created during quantitative easing, a measure that further swells the cost since it now pays out more than it receives in bond interest. This creates a strain under the government’s rules on current spending.

Current fiscal rules, set by Chancellor Rachel Reeves, require that all day to day public spending must be covered by tax revenues by the end of the decade. Analysts point out that Reeves faces a funding gap of £20 billion to £30 billion before the next budget, and the Bank’s growing bond related losses tighten this constraint further.

Economists have called on the government to reconsider its agreement with the Bank of England regarding loss coverage, drawing comparisons with the US Federal Reserve and the European Central Bank, where taxpayers are not directly responsible for central bank losses. Some suggest that this change could free up substantial resources for public spending priorities.

The Bank of England defends its policy, noting that the quantitative easing programme ultimately delivered significant savings in government borrowing costs, offsetting much of the losses. Bank estimates suggest lifetime savings of up to £125 billion in lower gilt yields, balancing out net transfers from HM Treasury. However, ongoing debates at Westminster and in financial circles continue over the most effective way to manage such central bank activities and limit their impact on public finances.