Taxpayers on the hook for “unwanted hangover from quantitative easing”
23 November 2022
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Julian Jessop writes in The Telegraph
IEA Economics Fellow Julian Jessop has written for The Daily Telegraph discussing taxpayers’ liability for the losses made by the Bank of England’s Asset Purchase Facility (APF).
Julian wrote:
“First, the technical details. This is yet another unwelcome hangover from quantitative easing (QE). Under QE, the Bank’s APF bought government bonds, or gilts, by crediting the accounts that commercial banks hold at the central bank, using newly-created money. These accounts, known as central bank reserves, pay interest at the Bank Rate, which is currently 3pc.
“The APF also receives interest on these gilts from the Government, like any other bondholder, in the form of coupon payments. When these payments are higher than the cost of the reserves, the Bank has been making a profit, which it has paid back to the Treasury. This is where it gets interesting. Since 2012, the Treasury has received a whopping £120bn from this source.”
Julian then outlined taxpayers’ liability for the scheme, writing:
“Unfortunately, the Bank Rate is now higher than the average interest rate earned on the APF’s gilt holdings. The Bank will also be realising losses on some gilts when they are redeemed or sold back at lower prices than the APF originally paid for them. The Treasury will have to compensate the Bank for these losses.
“The Office for Budget Responsibility has estimated that these losses will amount to £133bn between now and March 2028. The accounting here is complicated, but the basic point is that this is cash that the Treasury has to find from somewhere, presumably by even more borrowing.
“The Treasury guarantee on the Asset Purchase Facility and the payment of interest on reserves were not a big deal when APF holdings were small and official interest rates were low. However, the changing circumstances now justify a rethink.”
You can read Julian’s full article here.
Julian wrote:
“First, the technical details. This is yet another unwelcome hangover from quantitative easing (QE). Under QE, the Bank’s APF bought government bonds, or gilts, by crediting the accounts that commercial banks hold at the central bank, using newly-created money. These accounts, known as central bank reserves, pay interest at the Bank Rate, which is currently 3pc.
“The APF also receives interest on these gilts from the Government, like any other bondholder, in the form of coupon payments. When these payments are higher than the cost of the reserves, the Bank has been making a profit, which it has paid back to the Treasury. This is where it gets interesting. Since 2012, the Treasury has received a whopping £120bn from this source.”
Julian then outlined taxpayers’ liability for the scheme, writing:
“Unfortunately, the Bank Rate is now higher than the average interest rate earned on the APF’s gilt holdings. The Bank will also be realising losses on some gilts when they are redeemed or sold back at lower prices than the APF originally paid for them. The Treasury will have to compensate the Bank for these losses.
“The Office for Budget Responsibility has estimated that these losses will amount to £133bn between now and March 2028. The accounting here is complicated, but the basic point is that this is cash that the Treasury has to find from somewhere, presumably by even more borrowing.
“The Treasury guarantee on the Asset Purchase Facility and the payment of interest on reserves were not a big deal when APF holdings were small and official interest rates were low. However, the changing circumstances now justify a rethink.”
You can read Julian’s full article here.
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