Taxpayers on the hook for ‘huge’ losses as Bank of England starts selling piggy banks it bought after financial crisis
- Since the 2008 crisis and during the pandemic, the Bank of England has bought 875 billion pounds of gilts
- Analysts say the bank will lose up to 20 billion pounds a year over the next two years
- This is based on the assumption that the price of piglets remains low
Taxpayers face “enormous” losses as the Bank of England begins to wind down its massive money-printing programme, experts have warned.
The dire forecast is another headache for Chancellor Jeremy Hunt as he considers raising taxes and cutting public spending to repair battered public finances and restore confidence in financial markets.
Today, the Bank is due to start selling some of the £875 billion in government debt or debt obligations it has bought since the financial crisis and during the pandemic to help keep the economy afloat.
The bank is to start selling some of the £875bn it has bought since the 2008 crisis.
By selling gilts, known as “quantitative tightening” (QT), the Bank’s Monetary Policy Committee (MPC) hopes to dampen inflation by reducing the amount of money in circulation.
But analysts say the Bank could lose up to £20bn a year over the next two years on the trade if the price of pigs, which has fallen sharply this year due to rising inflation, remains low.
“The taxpayer is on the hook — big time,” said Stefan Koopman, senior macro strategist at Dutch banking group Rabobank, an investment bank.
The expected losses from the bond sales will be included in the Office for Budget Responsibility’s projections when Hunt releases his fall statement on Nov. 17.
The bank aims to reduce its balance sheet by around £80bn next year, but is likely to sell in a market where prices are lower than those paid in the bond buying phase.
The Quantitative Challenge: Jeremy Hunt
That means it will have no choice but to write off losses from its quantitative tightening program – leaving taxpayers to pick up the tab themselves.
“The cost of QT is likely to be huge,” said Imogen Bakra, head of UK rates strategy at NatWest Markets. “The blow to public finances is twofold.
“On the one hand, QT is losing money because the Treasury is absorbing the Bank of England’s losses when the pigs are sold for less than they are paid.
“On the other hand, while QE [quantitative easing] gilts not sold, Bank of England pays bank rate [interest] on the £900bn of reserves built up to buy them. The higher the bank rate, the more expensive these interest costs become.”
That poses a dilemma for the MPC, which this week is expected to implement its biggest interest rate hike in 30 years by raising the cost of borrowing from 2.25 percent to 3 percent to tackle inflation.
Hunt is considering introducing a windfall tax for banks to balance the balance sheet.