Taxpayers are on the hook for ‘vast’ losses as the Bank of England starts to unwind its massive money-printing programme, experts have warned.
The dire forecast is another headache for Chancellor Jeremy Hunt as he considers a range of tax rises and public spending cuts to repair the battered public finances and restore credibility in the financial markets.
The Bank is today due to begin selling some of the £875billion of gilts – Government debt or IOUs – it bought since the financial crisis and during the pandemic to help keep the economy afloat.
The Bank is due to begin selling some of the £875bn of gilts it bought since the 2008 crisis
By selling gilts, known as ‘quantitative tightening’ (QT), the Bank’s Monetary Policy Committee (MPC) hopes to ease inflation by reducing the amount of money in circulation.
But analysts say the Bank stands to lose up to £20billion a year over the next two years on the trade if the price of gilts – which has plummeted this year as inflation has ballooned – stays low.
‘The taxpayer is on the hook – big time,’ said Stefan Koopman, senior macro strategist at Dutch banking group Rabobank, an investment bank.
The expected loss on bond sales will be included in the Office for Budget Responsibility’s forecasts when Hunt unveils his Autumn Statement on November 17.
The Bank aims to shrink its balance sheet by around £80billion in the coming year but it is likely to be selling into a market where prices are lower than those paid during its bond-buying phase.
Quantitative quandary: Jeremy Hunt
This means it will have little choice but to book losses as a result of its quantitative tightening programme – leaving the taxpayer to pick up the tab.
‘The cost of QT is likely to be vast,’ said Imogen Bachra, head of UK rates strategy at NatWest Markets. ‘The hit to public finances is two-fold.
‘On one hand, QT loses money because the Treasury takes the BoE’s losses when gilts are sold at a lower price than paid.
‘On the other hand, while QE [quantitative easing] gilts are not sold, the BoE pays Bank Rate [interest] on the £900billion reserves it created to buy them. The higher the Bank Rate rises, the more costly this interest expense becomes.’
This poses a dilemma for the MPC, which this week is expected to implement its biggest interest rate rise for 30 years by raising the cost of borrowing from 2.25 per cent-to-3 per cent to combat inflation.
Hunt is considering a windfall tax on banks to help balance the books.
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