LONDON: The Bank of England forecast on Tuesday that it would make a net loss of just over 150 billion pounds ($193 billion) over the next 10 years as it unwinds its quantitative easing (QE) gilt purchases, up from 100 billion pounds projected in April.
That loss will need to be funded by the government. Under the terms of the QE programme, which started in 2009 as a means to stimulate the economy after the global financial crisis, Britain’s finance ministry effectively received back the interest payments on government bonds bought by the BoE, but agreed to compensate it for any future losses.
The BoE forecasts are based on the market path for interest rates, and are highly sensitive to changes in interest rate expectations and how fast it sells the 875 billion pounds of British government bonds it bought from 2009 to 2021.
Bank of England says UK economy coping with higher rates
Higher BoE rates reduce the market value of the gilts it holds and increase the interest it pays to banks. Both BoE rates and financial markets’ expectations for where they will peak have risen sharply over the past three months.
Between 2009 and 2022, the BoE paid the government 124 billion pounds, representing 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 BoE expects the government to pay around 40 billion pounds a year in 2023, 2024 and 2025, roughly 10 billion pounds a year more than its last estimate in April.
These payments from the government to the BoE reflect the much higher interest rate which the BoE now pays to banks which deposit money with it, which has risen from 0.1% in December 2021 to 5% as of June.
Markets currently expect BoE rates to peak at 5.75% later this year, up from around 5% at the time of the last report.
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