Taxpayers face a £167 billion bill from the Bank of England caused by losses from its multibillion-pound bond- buying programme that started in the financial crisis.
The Bank still owns £830 billion of government bonds, or gilts, that it bought through quantitative easing (QE) from 2009, when Britain’s banking system was on the brink of collapse. During the pandemic, it started to buy gilts again.
Andrew Bailey, the Bank’s governor, started selling off the gilts in October as part of his efforts to tighten monetary policy in order to tame soaring inflation.
But the gilts are worth less than the Bank paid for them. Calculations by Mark Capleton, head of inflation-linked research at Bank of America, show that if the Bank sold all those gilts at once, it would face a loss of £167 billion. While this is not expected to happen, the numbers are an attempt to illustrate the scale of the transfers from the Treasury to the Bank in the coming years. Under the terms agreed with the Treasury, the Bank cannot incur any losses on QE.
“The Treasury will have to make hard payments over to the Bank of England for years to come,” said Capleton.
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The Treasury made its first payment to the Bank in October — for £800 million — but the sums are expected to increase. The next of the payments, which are made on a quarterly basis, is due this month.
For the whole of this financial year, to April 2023, Capleton expects £5.5 billion to be paid to the Bank.
The losses arise because the value of the gilts has fallen and interest rates have risen above the 2 per cent level that the Bank was receiving in “coupon” payments from the Treasury.
Until recently, the Bank was giving this money back to the Treasury — £124 billion in total. But the payments are now starting to be reversed as the Bank sells the gilts and starts to crystallise losses.
This financial year’s payments are lower than might have been the case because the Bank should make a profit of about £3.7 billion from the emergency bond-buying programme it had to instigate after Kwasi Kwarteng’s ill-fated mini-budget.
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For the next year, Capleton’s calculations point to £33 billion to £34 billion.
The actual figures will depend on interest rates and the yields on gilts at the time.
The Treasury declined to comment.
