QT: Taxpayer faces bill as Bank starts selling gilts
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Taxpayers are on the heels of ‘huge’ losses as the Bank of England begins selling gold-plated government bonds it’s bought since the financial crisis
- The BoE has bought £875bn worth of gilts since the 2008 crisis and during the pandemic
- Analysts say the bank will lose up to £20bn a year over the next two years
- This is based on the assumption that the price of gilts will remain low
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Taxpayers are on the lookout for ‘huge’ losses as the Bank of England begins to unwind its massive money-printing program, experts warn.
The bleak forecast is another headache for Chancellor Jeremy Hunt as he contemplates a series of tax hikes and cuts in government spending to restore battered public finances and restore credibility in financial markets.
The Bank will today begin selling some of the £875bn of sovereign debt – government debt or IOUs – it has bought since the financial crisis and during the pandemic to prop up the economy.
The Bank will begin selling some of the £875bn worth of gilts it has bought since the 2008 crisis
By selling gilts, known as “quantitative tightening” (QT), the Bank’s Monetary Policy Committee (MPC) hopes to reduce inflation by reducing the amount of money in circulation.
But analysts say the Bank will lose up to £20 billion a year in trading over the next two years if government bond prices – which have plummeted this year as inflation rose – remain low.
“The taxpayer is on the hook, great,” says Stefan Koopman, senior macro strategist at the Dutch banking group Rabobank, an investment bank.
The expected loss on bond sales will be included in the Office for Budget Responsibility forecast when Hunt unveils its fall statement on Nov. 17.
The Bank aims to reduce its balance sheet by around £80bn in the coming year, but is likely to sell in a market where prices are below those paid during the bond purchase phase.
Quantitative Dilemma: Jeremy Hunt
This means it has little choice but to incur losses from its quantitative tightening program, leaving taxpayers footing the bill.
“The cost of QT is likely to be huge,” said Imogen Bachra, head of UK pricing strategy at NatWest Markets. “The blow to public finances is twofold.
“On the one hand, QT loses money because the Treasury takes on the BoE’s losses when gilts are sold at a lower price than paid.
‘On the other hand, while QE [quantitative easing] gilts are not sold, the BoE pays bank rate [interest] on the £900 billion reserves it created to buy them. The higher the bank interest rate rises, the more expensive this interest charge becomes.’
This poses a dilemma for the MPC, which this week is expected to implement its largest rate hike in 30 years by raising the cost of borrowing from 2.25 percent to 3 percent to fight inflation.
Hunt considers a windfall on banks to balance the books.