The Bank of England’s “bond-buying” scheme could now cost the public £126bn to cover losses, estimates by the Office for Budget Responsibility show.
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The scheme, implemented in 2008, has resulted in losses, after the BOE looks to reduce bond holdings, as interest rates and inflation soars.
Here’s how we got here…
Following the 2008 financial crisis, between 2008-2022, the Bank of England sought to improve financing conditions for companies.
It saw the BOE purchase £895 billion worth of bond holdings while interest rates were historically low.
Bonds are “IOUs” issued by the government.
And selling bonds is how governments borrow money.
So, by selling government bonds to the BoE, it allowed the government extra money to support companies with their recovery after the financial crisis of 2008.
The bonds were purchased during a period of quantitative easing; this is where the BoE created money digitally in the form of central bank reserves.
The bank also bought hundreds of billions of pounds of bonds during the pandemic in efforts to support the economy.
The upside to this was, £123.9bn of cash profits transferred to the Treasury in the decade to October 2022 “when interest rates were at historically low levels”, according to the Office for Budget Responsibility.
But now, with higher inflation, it means that interest rates are reversing this, and increasing losses – not profits.
Due to this, it also means that debt is increasing, as The Bank looks to sell some of the bonds in its stockpile.
When quantitative easing was launched in 2009, it was agreed the government must cover any losses immediately.
This is unlike some other countries, where central banks allow the losses to be kept on their balance sheet over a period of several years, reducing the instant impact to taxpayers.
The balance sheet is a measure of a country’s wealth and shows the estimated value of their assets – often used for international comparisons.
Over more previous months, the bank was reducing its stock by £80bn.
But the Bank’s recent decision to reduce the amount of bonds it holds, this year at the faster pace of £100bn, it is expected to result in a bigger bill for the Treasury which will need to cover the short-term losses.
These bonds are being reduced by the BOE “actively selling them” and no longer “reinvesting the proceeds from maturing bonds”.
This process is known as ‘quantitative tightening’ or ‘unwinding QE’.
It is also why the taxpayers are expected to be hit with an additional £126 Billion bill to cover the debt, according to the OBR.