The Bank of England estimates that the Treasury will need to transfer £150bn to cover the expected losses of the central bank’s quantitative easing program by 2033, an increase from the previous calculation of £100bn.
The transfers are a combination of the ongoing cash flow losses from the QE Scheme, under which the BoE purchased large quantities of gilts as well as any gains or losses that the central bank makes when the bonds mature or the assets are sold.
The scheme was expected to lose money as interest rates increased, but over the last year the cost estimated to UK taxpayers has risen sharply due to the tightening of monetary policy.
On Tuesday, the BoE released its latest estimate of transfers from Treasury to cover losses in its asset purchase facility (which houses its bonds purchased under QE) and published it.
Jagjit Chadha of the National Institute of Economic and Social Research (a think tank) said that it was “increasingly obvious” that the BoE QE losses would constrain fiscal policy for any Budget pre-election, as they are now greater than what the UK fiscal watchdog factored in its forecasts.
In response to the global economic crisis, the BoE started using quantitative easing (QE) by amassing £895bn in bonds between 2009 and 2020 in order to stimulate the economy at a time when interest rates are already low.
The company began to unwind these holdings in October last year. Initially, it stopped reinvesting maturing assets and then, since October, sold bonds at an estimated pace of around £80bn per year.
A 2009 agreement between the BoE and the Treasury provides compensation for losses incurred by the QE program. This is to prevent the BoE’s monetary policy from being constrained by its balance sheet.
Dave Ramsden said that the BoE deputy governor for markets, banking and financial services, Dave Ramsden stated earlier this month, it is important to not take into consideration “financial risk or profit” when making monetary policy decisions, including in relation to the central banks gilt portfolio.
The transfers between BoE and Treasury do have implications for the taxpayers.
The Office for Budget Responsibility, in its forecasts for the Budget of March, estimated that the QE scheme’s remaining lifespan would lead to a net cumulative loss of 63bn pound sterling.
This estimate was based upon the market price for interest rate path in early February, when investors expected the BoE would win its fight against high inflation with greater ease than it has proven to be.
In April, the BoE predicted that losses would eventually reach £100bn. In a report on the asset purchase facility published in the BoE’s quarterly report, the latest estimates show that net transfers to the Treasury from 2033 could be more than PS150bn. This is if the interest rates continue the upward trend priced into the markets at the end June and peak near 6%.
The BoE anticipates that the Treasury will transfer approximately £40bn each in 2023, 2020, and 2025.
The BoE had predicted that the BoE would be able to spend about £10bn per year more than it did in April. This suggests the government may face increased pressure on public finances as we approach the next elections.
The BoE stressed that the latest estimate is highly dependent on the assumptions made about interest rates and asset sales.
Even if interest rates were to fall gradually over the following three years in a scenario of a “soft-landing”, the losses would still be more than £100bn over the course of the QE program.
OBR stressed that cash flows related to QE, and their reversal, are not the same as an assessment on the program’s fiscal impact overall. This is because QE supported the economy and the financial markets for a long time.