Bank of England projects 100 billion pound loss for QE programme

FILE PHOTO: People sit onboard a public bus outside the Bank of England in the City of London financial district in London

By David Milliken

LONDON (Reuters) -The Bank of England estimated on Friday that its quantitative easing programme would rack up a total financial loss of around 100 billion pounds ($125 billion) by 2033, which will need to be funded by the government.

In the short term, the BoE expects the government will need to pay it almost 30 billion pounds a year - similar to earlier estimates but an unwelcome cost when high inflation has strained the public finances and Prime Minister Rishi Sunak hopes to cut taxes ahead of the likely election next year.

Under the terms of the QE programme, which first 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.

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 it almost 30 billion pounds a year in 2023, 2024 and 2025, roughly similar to previous estimates it made in November and January although rather more than government forecasters predicted in March.

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 4.25% as of March.

"Any future cash transfers will be handled under the terms of the indemnity as has been the case to date," finance minister Jeremy Hunt said in a letter to the BoE on Friday, acknowledging the report and referring to a 2012 agreement on the costs.

Last year two former BoE deputy governors suggested the BoE and the government should consider stopping paying interest on some of banks' holdings with the BoE, but this was rejected by BoE Governor Andrew Bailey.

The BoE bought 875 billion pounds of government bonds between 2009 and 2021, but is now reducing its holdings at a rate of 80 billion pounds a year, through a mix of outright sales and not reinvesting the proceeds of maturing bonds.

The longer-term net cost of the programme - which factors in the 124 billion pound profit made previously - is highly sensitive to the future path of interest rates, and could be less than 50 billion pounds or more than 150 billion pounds, similar to previous BoE estimates.

The 100 billion pound net cost estimate by 2033 is based on financial market's expected path for BoE rates, which sees borrowing costs likely to reach 5% later this year as the BoE seeks to tame inflation.

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

($1 = 0.8027 pounds)

(Reporting by David Milliken; Editing by Andy Bruce and Alison Williams)