The Bank of England lost more than three times as much on its quantitative easing (QE) as the Federal Reserve, according to new research, which could reignite the political debate over the cost of more than a decade of BoE stimulus.
Christopher Mahon, head of dynamic real returns at asset manager Columbia Threadneedle, said the Bank of England's losses on its portfolio of gilts bought between 2009 and 2021 were equivalent to 4.7% to 4.9% of Britain's gross domestic product. That compares with losses of 1.3% to 1.5% for the Fed and 3.2% to 3.4% for the ECB.
Bank of England's QE costs are higher than other major central banks
Under a guarantee agreed in 2009, the Bank of England's deficit, equivalent to about 130 billion pounds ($165 billion), must be borne entirely by taxpayers.
Costs of that magnitude have thrust the Bank of England into a political vortex in the weeks before the July 4 election because it drains money from the government for public services or tax cuts. The right-wing Reform UK party has pledged to intervene to stem the losses and save Britain £35bn a year.
At its peak, the Bank of England held £895 billion in bonds, an effort to protect the UK economy from the global financial crisis and the pandemic. QE once brought the UK Treasury a profit of £124 billion. However, the UK Treasury spent the money and is now losing billions of pounds as the Bank of England seeks to shrink its balance sheet.
The losses come as the government is paying more in interest on reserves it has set up to buy gilts than it is earning on the coupons on the securities it holds. The Bank of England is also selling gilts for less than it paid for them.
The UK Treasury has lost half of its profits from QE
The Reform Party's approach is seen as extreme, but Mahon expects Labour to form a new government because the party is around 20% ahead of second place in the polls, which "could reactivate the Treasury" and lead the Bank of England to "take a different approach to QE than the status quo."
The Bank of England is the only major central bank to actively sell bonds, which will result in losses for the Bank of England in the early stages. The Federal Reserve and the European Central Bank allow bonds to mature. Last month, the Federal Reserve slowed the pace of bond maturities to ensure that it would not put pressure on the market.
Mahon expects the BoE to end its aggressive bond sales program in line with the European Central Bank and the Federal Reserve when it reviews the program in September. He estimates that aggressive sales of gilts will cost it between 5 billion and 7 billion pounds this year.
He expects the Bank of England will argue that ending its aggressive bond sales program, which is a form of policy tightening and the opposite of rate cuts, is consistent with the start of a rate-cutting cycle, which it is expected to start lowering in the autumn.
It is important to note that Mahon uses the market value of UK gilts on May 31, 2024, and adjusts the gains from the early stages of QE to calculate the estimate of the Bank of England's QE losses.
Mahon said the BoE's deficit was larger than the ECB and Fed because it bought longer-dated bonds, which lose more value, and it bought a larger proportion of gilts at the peak of its QE program.
In this assessment, the Bank of England cited recent comments by its governor, Andrew Bailey, that "different strategies for reducing the balance sheet may affect the timing of cash flow credits, but will not necessarily change the cumulative amount of asset purchases over the life of the programme."
The article is forwarded from: Jinshi Data
