Columbia Threadneedle: Will the Bank of England have to change course on QE losses?
Figures out last month showed the quantitative easing (QE) programme is on course to lose £170 billion over its lifetime.
20.12.2023 | 06:07 Uhr
- The Bank of England’s (BoE) unwind of its QE programme is radically different to other central banks – making the BoE something of an outlier
- The BoE may have to change course. Questions are being asked. Hints are being dropped. Markets (and taxpayers) would cheer
Figures published last month by the Bank of England (BoE) updated the forecasts of the economics of the QE programme to a projected £170 billion net cost1.
This is a huge figure – about 7.5% of gross domestic product (GDP) and will have to be borne by the Treasury. Other central banks also have QE costs but the BoE unwind of quantitative easing (QE) is generating by far the worst headlines. This is because the BoE QE programme is unique in three ways:
- During the QE era, the BoE bought proportionally much more government debt than other central banks – leaving it most exposed when rates went up.
- Only the BoE is actively selling government bonds which locks in the losses at the current low prices. Other central banks are not actively selling and holding the bonds to maturity, avoiding immediate capital losses and giving time for the interest rate environment to improve.
- While other central banks treat any costs as an accounting entry with little real world implications, the BoE requires any losses to be immediately made good by the taxpayer.
In the world of central banking, these differences make the Bank something of an outlier when it comes to QE. Any attempts to bring it in line with other central banks would be cheered by the market – and the Treasury.
More on that later. Before we get into the detail, let’s recap the context.
After years of money printing where central banks actively bought government bonds, QE is in reverse. Central banks wish to shrink their balance sheets and are reversing the QE process. They no longer wish to buy bonds. The central banks now wish to exit those positions. The process is called “quantitative tightening” or QT.
But while all central banks are seeing some form of losses, it is the BoE which has the most eye-catching situation due to its outlier status:
1Asset Purchase Facility Quarterly Report, Q3 2023
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