UK government faces £30bn bill to cover QE losses

© Reuters. UK government faces £30bn bill to cover QE losses

Proactive Investors – The government may need to pay the Bank of England (BoE) more than £30bn for the next two years to cover losses on its quantitative easing (QE) programme, a report from the central bank showed.
The BoE started buying government bonds in 2009 and the size of the QE programme peaked at £895bn in December 2021.
Until recently, the government received profits made by QE, totalling £120bn between 2009 and 2022, reflecting low interest rates.
But recent sharp rises in the cost of borrowing have meant these flows have reversed and last month the government paid the BoE £828mln to cover the losses with this cost set to grow rapidly.
Laith Khalaf, head of investment analysis at AJ Bell, pointed out: “That’s because the Treasury pays base rate on the government debt held by the Bank of England, and for the first time since the scheme was launched in 2009, that is now higher than the interest coupons on that debt.”
“On top of that the Bank of England will also require payment for the losses it sustains as it winds down its QE scheme, selling gilts below the price it bought them at.”
“This is the very thin end of the wedge, because the OBR estimates there will be cash transfers of £133bn from the Treasury to the Bank of England to cover the QE scheme over the next 5 years, adding 2.1% of GDP to government debt by 2028” he estimated.
Last week, the UK budget watchdog, the Office for Budget Responsibility, forecast that the government would need to pay the BoE £133bn up until the end of March 2028, wiping out the earlier profits.
And yesterday the BoE updated its own projections which showed projected annual net cash flows from the Treasury to the BoE of more than £30bn in 2023 and 2024 – roughly in line with the OBR’s projections.
Looking out to 2033, the cumulative net loss on the QE programme could range from less than £50bn to almost £200bn, depending on the path of interest rates, the projections showed.
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