Bank Of England Bonds Bungle

May 1, 2024

New forecasts suggest that the government could be facing a hefty bill of £85 billion as the Bank of England unwinds its quantitative easing program. This figure, revealed in a quarterly update, represents a slight uptick from the Bank’s previous upper estimate of £80 billion and underscores the cost to taxpayers of the Bank’s efforts to rejuvenate the economy following the financial crisis.

In the aftermath of the 2008 banking collapse, the Bank initiated a program of purchasing government bonds on the secondary market with the aim of reducing borrowing costs and stimulating economic growth. This endeavour continued with additional rounds of quantitative easing post-Brexit and during the onset of the COVID-19 pandemic.

To facilitate the purchase of bonds from financial institutions, the Bank generated new commercial bank deposits, on which it incurred interest payments. Initially, when interest rates were low, the returns from government bonds exceeded the interest paid on these new deposits, resulting in benefits amounting to £123.8 billion being transferred to the Treasury between 2009 and September 2022.

However, with rising interest rates, the costs of the program now surpass the returns from gilt yields, leaving the Treasury responsible for covering the shortfall. While the Bank has begun offloading over £100 billion from its balance sheet since November 2022, it still retains approximately £728.1 million in bonds, with plans to continue selling them back into the market until the 2030s.

The Bank cautions that future flows from the Asset Purchase Facility, the mechanism through which bonds were acquired, remain “highly uncertain” and hinge on various factors, including fluctuations in interest rates.

In a recent report, the influential Treasury Committee highlighted the significant costs associated with the program, raising concerns about the lack of normal value-for-money considerations in the expenditure of substantial public funds.