Blunders break the Bank
26 September 2023
SUGGESTED
In the Media
Matthew Lesh quoted in Conservative Home
26 September 2023
Housing and Planning
Matthew Lesh quoted in The Express
26 September 2023
Economic Theory
11 November 2024
IEA research featured in The Telegraph
Sir John Redwood MP, the author of a new paper published by the IEA criticising the Bank of England for its handling of inflation, has written about his new research in The Daily Telegraph.
Sir John wrote:
“Today it is critical the Bank gets its forecasts right and avoids lurching from too easy a policy to too tight a policy. The Bank seems to underestimate the impact its bond buying and selling has. The main purpose of the bond buying in 2020-21 was to push up bond prices and so to lower the longer term interest rates that affect mortgages and company borrowings. Now, the Bank is embarking on a large sales programme which it tells us will have little impact. Will it not serve to depress bond prices and keep longer rates higher, as surely as buying the bonds did the opposite?
“A year ago, when the Bank first announced an £80 billion a year cut in its bond holdings, which included substantial sales at big losses in the market, the bond market fell away. More sales were added as a result of overextended positions in bonds by some pension funds. They had to sell assets as bond prices declined. The Bank had to temporarily reverse policy and buy bonds again to stop a further fall in markets. The Kwarteng budget was rapidly reversed but bond yields returned to high levels as the Bank sold more.
“The bond sales in the market usually mean bigger losses than holding the bonds until they mature, when they are repaid by the government. These losses all have to be reimbursed by the Treasury, swelling the state deficit excluding the Bank of England. In my new paper, published today by the Institute of Economic Affairs, I highlight that the Bank of England’s bond sales could cost taxpayers as much as taxpayers £100 billion.”
Read the full article here.
Read more about Sir John’s paper The New Great Inflation: How Western Central Banks Got It Wrong…and What They Should Do About It, here.
Sir John wrote:
“Today it is critical the Bank gets its forecasts right and avoids lurching from too easy a policy to too tight a policy. The Bank seems to underestimate the impact its bond buying and selling has. The main purpose of the bond buying in 2020-21 was to push up bond prices and so to lower the longer term interest rates that affect mortgages and company borrowings. Now, the Bank is embarking on a large sales programme which it tells us will have little impact. Will it not serve to depress bond prices and keep longer rates higher, as surely as buying the bonds did the opposite?
“A year ago, when the Bank first announced an £80 billion a year cut in its bond holdings, which included substantial sales at big losses in the market, the bond market fell away. More sales were added as a result of overextended positions in bonds by some pension funds. They had to sell assets as bond prices declined. The Bank had to temporarily reverse policy and buy bonds again to stop a further fall in markets. The Kwarteng budget was rapidly reversed but bond yields returned to high levels as the Bank sold more.
“The bond sales in the market usually mean bigger losses than holding the bonds until they mature, when they are repaid by the government. These losses all have to be reimbursed by the Treasury, swelling the state deficit excluding the Bank of England. In my new paper, published today by the Institute of Economic Affairs, I highlight that the Bank of England’s bond sales could cost taxpayers as much as taxpayers £100 billion.”
Read the full article here.
Read more about Sir John’s paper The New Great Inflation: How Western Central Banks Got It Wrong…and What They Should Do About It, here.
SHARE
