Bank of England Lowers Estimated Losses from Bond-Buying Programme

By David Milliken

LONDON (Reuters) – The Bank of England (BoE) has revised its estimate of the net loss that Britain’s finance ministry will incur to cover the central bank’s bond-buying programme, lowering it to £115 billion ($155 billion).

The finance ministry had agreed to cover any losses when the BoE initiated quantitative easing in 2009 to stimulate the economy post-global financial crisis.

Gilt purchases continued until late 2021, following additional rounds aimed at mitigating the economic impacts of Brexit and the COVID-19 pandemic, before the £875 billion programme was reversed in February 2022. The BoE is currently reducing its stockpile at a rate of £100 billion annually.

Despite a £124 billion profit made by the finance ministry during low interest rates, BoE losses are projected to reach £30 billion annually in the forthcoming years due to current interest rates exceeding the average yield of the purchased bonds.

Critics, including politicians and former BoE deputy governors Charlie Bean and Paul Tucker, have voiced concerns over the QE programme structure, stating it unduly stresses public finances. However, BoE Governor Andrew Bailey argued that any changes could disrupt monetary policy, adding that the cash loss omits considerations of the economic growth and reduced government borrowing costs resulting from QE.

The BoE’s £115 billion loss estimate includes the £124 billion profit from pre-2022. This loss projection remains consistent regardless of whether the BoE sells bonds at £100 billion or slows to £80 billion a year, assuming ongoing interest rate cuts from the current 4% level.

Earlier estimates indicated a £120 billion loss in May, and a prediction of a £95 billion loss was made a year prior. The BoE mentioned that losses could decrease to approximately £55 billion if interest rates drop to around 2.5%, as assessed in 2018, with markets forecasting BoE rates will bottom at around 3.5% next year.

($1 = 0.7428 pounds)