Britain’s soaring interest rates have driven a £50 billion ($64 billion) jump in potential losses from the Bank of England’s quantitative easing program, which would have to be picked up by taxpayers.
(Bloomberg) — Britain’s soaring interest rates have driven a £50 billion ($64 billion) jump in potential losses from the Bank of England’s quantitative easing program, which would have to be picked up by taxpayers.
The Treasury will be forced to transfer more than £40 billion to the BOE next year alone to cover losses from the program, the central bank said in a quarterly report on its asset purchase facility released Tuesday.
The figures deepen concerns that the measures in place to boost the economy since the global financial crisis more than a decade ago will become a huge strain on the public finances in the coming years now that it’s being wound down.
Under QE, the BOE created new money to buy government and corporate debt from investors, helping to cap market interest rates. It was launched after the financial crisis and was also used heavily during the pandemic with the central bank’s balance sheet swelling to a peak of £895 billion.
QE as it was known was a boost for the country’s finances for several years. However, this has now been reversed by the rise in interest rates as the BOE reduces its balance sheet of bonds bought under the program.
Over the lifetime of QE, the Treasury will have to cover losses of over £150 billion, new estimates based from the BOE’s Asset Purchase Facility Quarterly Report showed. That figure is up from the about £100 billion estimated in April.
The forecast losses have been worsened by a surge in gilt yields in recent months after investors bet on the BOE needing to push up interest rates to clamp down on inflation. The BOE released a chart detailing potential losses based on four different scenarios for interest rates over the next decade.
Now the BOE is reversing the bond purchases under a program known as quantitative tightening, or QT, selling the debt or allowing it to mature and roll off the balance sheet. So far, those steps have reduced the amount of gilts and corporate debt it holds to £804 billion.
The BOE said the future hit from QT is “uncertain and highly sensitive to the assumptions used for market interest rates and how quickly the portfolio is unwound.” The losses could be cut again by a recent easing in bets on BOE rate hikes after signs that UK inflation is falling.
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