The Bank of England has estimated that it will require the UK Treasury to transfer a total of £100bn by 2033 to cover expected losses on its bond-buying quantitative easing programme.
The transfers, which were always anticipated if interest rates rose, represent both the continuing cash flow losses of the QE scheme and gains or losses made by the central bank when government bonds mature or the central bank sells the assets.
The movement of government money between the Treasury and the BoE has been included in forecasts for the public finances from the Office for Budget Responsibility, the fiscal watchdog, and does not represent a new blow to hard-pressed taxpayers.
Every quarter, the BoE estimates the likely future flows of money it will either pay the Treasury or need to receive from it under the indemnity both signed in 2009, ensuring the latter bore all of the financial risks from QE.
At first, the scheme was highly profitable because overnight interest rates were close to zero and the government bonds bought by the BoE to stimulate the economy still paid a significant rate of interest.
But as overnight interest rates have risen to the current value of 4.25 per cent, the BoE is transferring money to commercial banks at this rate on the money it created in the QE scheme, which sits as deposits in the banking system. That rate is significantly higher than the current yield on the government bonds owned by the central bank.
When the BoE sells its stock of bonds under its £80bn-a-year quantitative tightening programme, the value is likely to be lower now than the price it paid for the bonds because yields have risen. Prices fall when bond yields rise.
Between its start in 2009 and late last year, when it went into deficit for the first time, the QE programme was lucrative for taxpayers.
The BoE said on Friday that the Treasury had made a second payment in January this year. It also published a projection that if interest rates followed the current path expected by financial markets, the accumulated surplus of the scheme of £123.8bn last autumn would fall to zero by 2027 and register a deficit of £100bn by 2033.
Announcing its £100bn forecast on Friday, the central bank stressed the figures were estimates. “Future cash flows are uncertain and highly sensitive to the assumptions used for market interest rates and how quickly the [QE] portfolio is unwound,” it said.
At the time of the March Budget, the OBR stressed that these figures represented flows of money between two arms of government and that the ultimate cost of servicing the UK’s debt had always included estimates of these flows.
“We have been forecasting future losses (dependent on market expectations and QE policy assumptions) since our first forecast with [QE] flows in December 2012,” the OBR said in its Budget document.
