The Bank of England Faces Losses on Bond Selling Programme
The Bank of England’s bond selling programme, aimed at unwinding the quantitative easing measures implemented during the financial crisis, is now at risk of incurring losses due to rising interest rates that are pushing down bond prices.
In a recent report published by the Bank of England, it was revealed that the UK government is projected to absorb losses of £150 billion over the next decade as a result of the quantitative easing programme. This figure includes an additional £50 billion due to the impact of rising interest rates.
Following the financial crisis in 2009, the Bank of England implemented a quantitative easing (QE) programme, purchasing £875 billion worth of bonds to stimulate the economy. As part of this process, the Bank created electronic money to pay for the bonds and paid interest on these reserves in line with the bank rate, which currently stands at 5%.
During a period of low interest rates, this arrangement allowed the Bank to generate profits as the interest paid on the reserves was lower than the interest received on the bonds purchased through QE. In 2012, the profits from QE were directed back to the Treasury by then Chancellor George Osborne, resulting in a reduction of government debt by approximately £120 billion.
However, the recent increase in the bank rate has reversed this trend. Between 2009 and 2022, the Bank of England paid the government £124 billion in profits. The Bank’s report highlights the uncertainty and sensitivity of future cash flows, which are heavily dependent on market interest rates and the speed at which the bond portfolio is unwound.
As the Bank of England continues to unwind its QE programme by selling the bonds purchased under the scheme, the rising interest rates are causing bond prices to decline, leaving the Bank exposed to potential losses.
It is crucial for the Bank to carefully navigate this challenging environment to minimize losses and ensure the stability of the financial system.