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Bank of England tweaks lifetime loss estimate for QE programme

by Jessica Weisman-Pitts
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2024 04 30T121931Z 1 LYNXMPEK3T0I3 RTROPTP 4 BRITAIN BOE PRIVATEEQUITY

By Andy Bruce

(Reuters) – The Bank of England on Tuesday tweaked its estimates for the overall losses made by its quantitative easing bond purchase programme that will fully crystallise over the next 10 years.

BY THE NUMBERS

The estimates assume the BoE will unwind its government bond portfolio at the current pace of 100 billion pounds ($125 billion) per year.

Based on the market path for interest rates as of late March, the QE programme looks set to generate a net loss of 85 billion pounds by 2034, compared with an estimate in February of 80 billion pounds.

If interest rates were to fall back to around 2.5%, the BoE’s 2018 estimate of the non-inflationary equilibrium rate, then the loss would be 45 billion pounds, compared with the earlier estimate of 50 billion pounds.

WHY IT MATTERS

Losses generated over the life of the QE programme have become a topic of political debate, because are covered by the taxpayer at a time when the government resources are increasingly stretched.

Last week, 48 lawmakers from the governing Conservative Party demanded the Treasury investigate how it can extract itself from these payments to the BoE.

In a letter to BoE Governor Andrew Bailey on Tuesday, finance minister Jeremy Hunt said it was important that fiscal and monetary policy decisions remained separate.

CONTEXT

Through the 2010s, the government received profits made by the QE programme when interest rates were low, which peaked at 124 billion pounds in 2022.

Those flows have reversed: now the government foots the bill for any losses the BoE makes as it pays higher interest on bank reserves issued for its QE programme.

The net loss forecasts take account of the earlier profits.

The BoE’s purchases of gilts peaked at 875 billion pounds after the COVID-19 pandemic and currently stand at 704 billion pounds.

($1 = 0.7978 pounds)

(This story has been corrected to show that 100 billion pounds is the total pace of the unwinding of QE, not the pace of active sales, in paragraph 2)

 

(Reporting by Andy Bruce, editing by David Milliken)

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