The government might have to foot a bill worth £85bn as the Bank of England unwinds its programme of quantitative easing, new forecasts suggest.
The latest estimate, released today in a quarterly update, is a slight increase on the Bank’s previous upper estimate of £80bn. It demonstrates the cost to the taxpayer of the Bank’s attempts to reinvigorate the economy after the financial crisis.
Following the banking collapse of 2008, the Bank started hoovering up government bonds on the secondary market. The hope was this would lower borrowing costs and stimulate economic activity.
Policymakers approved another small round of quantitative easing following the Brexit vote and embarked on a much bigger round at the onset of the Covid-19 pandemic.
To buy the bonds from other financial institutions, the Bank created new commercial bank deposits on which it had to pay interest. When interest rates were low, the yield the Bank received from government bonds exceeded the interest it had to pay on new commercial bank deposits.
Between 2009 and September 2022, these benefits – which amounted to £123.8bn – were transferred to the Treasury.
However, as interest rates have risen, the costs of the programme now comfortably exceed the return from gilt yields. The Treasury is on the hook for the difference.
The Bank has managed to offload over £100bn from its balance sheet, having started selling in November 2022, but it still holds around £728.1m of bonds which it expects to be selling back into the market until the 2030s.
The Bank noted that future flows from the Asset Purchase Facility, the vehicle created to buy up the bonds, are “highly uncertain” and depend on a range of factors, including how interest rates change.
In a recent report, the influential Treasury Committee drew attention to the costs of the scheme, suggesting it was “highly anomalous” that huge sums of public money were spent without normal value-for-money considerations.