Home Interest rate Bank of England predicts over £30bn in annual QE losses

Bank of England predicts over £30bn in annual QE losses


LONDON, Nov 22 (Reuters) – The British government may have to pay the Bank of England more than 30 billion pounds ($36 billion) next year and also in 2024 to cover losses from its easing program quantitative (QE), according to a report released by the central bank showed on Tuesday.

The BoE started buying government bonds in 2009 and the size of the QE program peaked at £895bn in December 2021, including £20bn of corporate bonds.

Under the terms originally agreed, the UK Treasury receives all the benefits of QE – but must compensate the BoE for any losses.

Since 2009, the BoE has paid the UK government £123 billion, which is the difference between the interest the BoE received on its bond holdings and the near-zero interest it paid to banks that deposited cash with of the BoE.

Now that the BoE is increasing the interest rate it pays banks, these flows have started to reverse. Last month, the UK Treasury paid £828m to the BoE to cover QE losses.

The cost is bound to increase rapidly. Last week the UK’s Office for Budget Responsibility, the country’s fiscal watchdog, forecast the government would have to pay £133bn to the BoE until the end of March 2028, wiping out the department’s earlier profits finances.

The BoE updated its own projections on Tuesday in the form of a chart in a quarterly report on its asset purchases.

This showed projected annual net cash flows from the UK Treasury to the BoE of over £30bn in 2023 and 2024 – roughly in line with the OBR projections, which are based on exercises and use different assumptions .

By 2033, the cumulative net loss from the QE program could range from less than £50 billion to almost £200 billion, depending on how interest rates move, according to projections.

Two former BoE deputy governors have said the BoE should consider paying interest to banks only on a portion of the deposits they hold at the BoE to limit losses.

BoE Governor Andrew Bailey said the current system helps ensure that rate hikes are properly transmitted to the wider economy.

The BoE stopped reinvesting the proceeds of matured gilts from its £875bn of QE gilts in February, and this month began active gilt selling.

($1 = 0.8411 pounds)

Reporting by David Milliken; edited by Barbara Lewis

Our standards: The Thomson Reuters Trust Principles.