The Bank of England is facing increasing calls to suspend its program of selling government debt, a policy that is anticipated to cost UK taxpayers more than £100 billion. This situation arises as the Bank's Monetary Policy Committee prepares to decide whether to maintain current interest rates this week, even as soaring energy prices, exacerbated by global conflicts, contribute to rising inflation.
The committee will also determine the pace at which the Bank proceeds with selling bonds it accumulated during periods of low interest rates. These sales are currently generating substantial losses for the Bank and, consequently, for taxpayers, as government borrowing costs globally have surged. The Treasury is responsible for absorbing these losses, which will add to the nation's existing debt burden and present a challenge for Chancellor John Healey as he prepares the upcoming budget.
Following the 2008 financial crisis and the pandemic, the Bank of England purchased £895 billion in bonds to support the economy. Initially, this quantitative easing policy proved profitable, transferring £124 billion to the Treasury. However, this trend reversed in 2022 when interest rates increased significantly to combat double-digit inflation, partly driven by the war in Ukraine.
Since then, the Bank has been actively selling gilts in a declining market, reducing its debt holdings to £489 billion. This strategy, however, has incurred mounting costs for taxpayers due to persistently high interest rates, which are expected to remain elevated or even increase further. The Office for Budget Responsibility forecasts additional losses of £94 billion over the next four years from the quantitative tightening plan, including £22 billion in crystallised losses from bonds sold before maturity.
Halting or slowing the pace of these bond sales, currently set at £70 billion annually, could mitigate these projected losses. The United Kingdom is noted as having the only major central bank currently engaged in the active sale of government debt.
Bank Governor Andrew Bailey acknowledged to Members of Parliament that the Bank's more transparent method of transferring losses to the Treasury has been "quite painful." He maintains, however, that reducing the Bank's balance sheet by divesting its debt holdings is crucial to ensure its capacity to intervene in the event of future economic shocks.
However, some economists advocate for a different approach. Gerard Lyons, chief economist at wealth manager NetWealth, suggested that the Bank should cease active quantitative tightening and allow its balance sheet to decrease naturally as bonds mature. William Ellis, senior economist at the Institute for Public Policy think-tank, commented that the Bank of England's approach is out of step with global trends, noting that the European Central Bank and the Federal Reserve are pursuing opposite strategies, with the latter buying back U.S. debt. Ellis suggested that a pause would be logical.
Economists anticipate that the Bank may slow its bond sales from £70 billion to £50 billion per year while continuing active gilt sales. Mike Denham, former chair of the TaxPayers' Alliance, characterized the policy as a "terrible mistake" and stated that "the Bank has painted itself into a corner."
Separately, Bailey has expressed opposition to increasing bank taxes to fund expenditures in health, welfare, and defense. Lenders are currently earning an additional £20 billion annually from interest on reserves held at the Bank of England, a situation attributed to higher-for-longer interest rates. A tiered system for these reserve payments has been proposed as a potential compromise to save taxpayer money while addressing the Bank's concerns about monetary policy transmission, though Bailey has resisted such changes, emphasizing the base rate's role as the primary tool for implementing monetary policy. He also cautioned that banks might adjust their margins by increasing borrowing costs for customers and lowering savings rates.