UK central bank predicts £100bn QE loss

UK Central Bank

By Mark McSherry

The Bank of England — the UK’s central bank — has estimated that its quantitative easing programme will make a total financial loss of around £100 billion by 2033, which will need to be funded by the UK government.

In the short term, the UK central bank expects the UK government will need to pay it almost £30 billion a year.

The £100 billion net cost estimate by 2033 is based on the expected path for Bank of England rates — with many market analysts expecting borrowing costs reaching 5% later this year.

The UK central bank had not previously published a central estimate for the cost under this scenario.

Bank of England Governor Andrew Bailey detailed the arrangements in a letter to Chancellor of the Exchequer Jeremy Hunt.

“The total future path of cash flows will continue to be highly dependent on the path of market interest rates, and on the MPC’s desired path for unwinding the assets held,” Bailey wrote in the letter.

“Our officials monitor the operational processes governing these cash flows closely, and will continue to do so.”

Reuters reported that under the terms of the QE programme the UK’s finance ministry effectively received back the interest payments on government bonds bought by the central bank, but agreed to compensate it for any future losses.

Between 2009 and 2022, the BoE paid the UK government £124 billion — the difference between the interest the BoE received on government bonds it had purchased and the near-zero interest rate it paid on cash deposited by the banks from whom it had bought the bonds.

However, the central bank now expects the UK government to pay it almost £30 billion a year in 2023, 2024 and 2025.

The BoE bought £875 billion of government bonds between 2009 and 2021 but is now reducing its holdings at a rate of £80 billion a year.

The longer-term net cost of the programme is sensitive to the future path of interest rates, and could be less than £50 billion or more than £150 billion.