UK Government Confronts £150bn Expense to Cover Bank of England’s QE Losses
Bank of England Increases Estimated Transfer to Treasury for QE Losses
The Bank of England has revised its estimate for the transfer required from the Treasury to cover expected losses on the central bank’s quantitative easing (QE) programme. The new estimate now stands at £150 billion by 2033, a significant increase from the previous calculation of £100 billion.
This transfer covers both the ongoing cash flow losses on the QE scheme and the gains or losses incurred by the Bank of England when bonds mature or are sold. Initially, the scheme generated profits, but the situation changed as interest rates rose, resulting in higher estimated costs to UK taxpayers over the programme’s lifespan, especially due to sharp monetary policy tightening.
QE was implemented by the Bank of England as a response to the global financial crisis, with the bank accumulating £895 billion in bond holdings between 2009 and 2022 to stimulate the economy amid record-low interest rates.
Starting last year, the bank began unwinding its bond holdings by ceasing reinvestments of maturing assets and selling bonds at an expected rate of around £80 billion annually.
The Bank of England is protected from losses on the QE programme through an agreement with the Treasury signed in 2009, ensuring that the central bank’s balance sheet doesn’t constrain monetary policy decisions.
However, the transfers between the Bank of England and the Treasury have implications for taxpayers. According to the Office for Budget Responsibility’s forecasts from the March Budget, losses from the remaining life of the QE scheme could result in a cumulative net loss of £63 billion. This estimate was based on market pricing for interest rate paths, but the actual losses may exceed that projection.
The latest estimates indicate that net transfers from the Treasury could surpass £150 billion by 2033 if interest rates follow the higher path priced into markets. In the short term, the Bank of England anticipates the Treasury to transfer approximately £40 billion annually in 2023, 2024, and 2025.
These transfers, equivalent to about 4% of gross domestic product (GDP), represent additional pressures on the government’s public finances in the lead-up to the next election.
The Bank of England’s estimate is highly sensitive to underlying assumptions on interest rates and asset sales pace. Even in a “soft landing” scenario where interest rates gradually decline over the next three years, losses over the lifetime of the QE programme are expected to exceed £100 billion.
It’s important to note that the cash flows related to QE and its reversal do not fully reflect the programme’s overall fiscal impact, as it served as crucial support to the economy and financial markets over an extended period.