The Bank of England is facing increasing calls to suspend a controversial bond-selling program that is expected to result in over £100 billion in costs for UK taxpayers. This comes as the Bank's Monetary Policy Committee (MPC) is anticipated to keep interest rates unchanged this week, despite rising energy prices driven by geopolitical events and their impact on inflation.
The MPC will also determine the rate at which the Bank sells off bonds from its balance sheet. These sales are currently realizing significant losses as global government borrowing costs escalate. The Treasury is responsible for covering these losses, which contribute to the national debt and present a challenge for Chancellor John Healey as he prepares the upcoming Budget.
Following the 2008 financial crisis and during the COVID-19 pandemic, the Bank of England purchased £895 billion in bonds to support the economy. These bonds were bought at high prices when interest rates were exceptionally low. The strategy of quantitative easing initially proved profitable, transferring £124 billion to the Treasury.
However, the situation shifted in 2022 when interest rates rose sharply to combat high inflation. Since then, the Bank has been selling gilts in a declining market. While this has reduced its debt holdings to £489 billion, the ongoing high interest rates are increasing costs for taxpayers. The Office for Budget Responsibility forecasts an additional £94 billion in losses over the next four years, including £22 billion from the active sale of bonds before they mature.
Halting or slowing the pace of these sales, currently at £70 billion annually, could mitigate these losses. The UK is noted as having the only major central bank actively selling government debt. Bank of England Governor Andrew Bailey acknowledged the difficulty of the current approach, describing the transparent transfer of losses to the Treasury as "quite painful," but argued that reducing the Bank's balance sheet is crucial for future intervention capabilities.
Some economists advocate for a more passive approach. Gerard Lyons, chief economist at NetWealth, suggested the Bank should stop active quantitative tightening and allow its balance sheet to decrease naturally as bonds mature. William Ellis, senior economist at the Institute for Public Policy, stated that the Bank of England's pace of bond sales is faster than that of the European Central Bank and the Federal Reserve, which are reportedly buying back US debt. Ellis proposed that a pause would be logical.
Economists anticipate that the Bank may reduce its annual bond sales from £70 billion to £50 billion while continuing with active gilt sales. Mike Denham, former chair of the TaxPayers' Alliance, described the policy as a "terrible mistake," adding that the Bank has "painted itself into a corner."
Separately, Bailey has opposed increasing bank taxes to fund public spending. Lenders are currently earning an additional £20 billion annually from interest on reserves held at the Bank of England due to higher interest rates. Lyons suggested a tiered system for these payments as a potential compromise to save taxpayer money while addressing the Bank's concerns about monetary policy transmission. However, Bailey maintains that the Bank's base rate is the primary mechanism for implementing monetary policy and cautioned that changes could lead banks to increase borrowing costs and lower savings rates for customers.