Market News

BY Tim Wallace

Andrew Bailey has claimed that money-printing by the Bank of England has saved the Government as much as £125bn.

The Bank’s Governor said new analysis showed the policy of creating money to buy bonds during crises aided the public finances over the past 15 years by pushing down borrowing costs.

Between 2009 and 2022 the Bank bought bonds totalling £895bn under a policy known as quantitative easing (QE), which aimed to relieve pressure on debt markets.

“The fiscal savings from lower government debt issuance costs as a result of QE ... [are estimated to] amount to £50bn to £125bn in net present value terms,” the Governor wrote in a letter to Rachel Reeves, the Chancellor.

“While many of these benefits accrued in the past, a significant proportion of the fiscal savings is still to be realised, given the long maturity at which the Government issued debt during the period that QE pushed down on yields.”

The claim follows sustained criticism over the costs of QE. Richard Tice, Reform UK’s deputy leader, wrote to Mr Bailey this year claiming Bank “is imposing tens of billions of pounds of unnecessary losses on the taxpayer” through the sales of bonds bought under the scheme.

Mr Bailey hit back at the claim in his letter, saying “it is likely that the fiscal benefits of QE significantly, or fully, offset” those costs when the full benefit to the public purse is considered.

Shift in balance

Also known as the Asset Purchase Facility (APF), QE was created as a way to lower borrowing costs when central banks had run out of room to cut interest rates. The Bank created new money to buy government bonds, thereby adding demand into the system and driving down interest rates on gilts, as UK government bonds are known.

Successive Chancellors promised that the Treasury would cover any losses incurred by the Bank through QE.

Initially, the scheme made a profit as the bonds earned interest that exceeded the costs of paying interest on the money created to buy them. This profit was transferred to the Treasury and ultimately totalled more than £120bn.

But once interest rates went up from the end of 2021, the balance shifted. The cost of paying interest on reserves soared and the value of the bonds dropped, resulting in a loss for the Bank.

As a result, the Treasury has been sending cash back to the Bank of England. In March, the Office for Budget Responsibility estimated these payments will soon fully erase the initial profits. It forecast that the Treasury will ultimately make a net loss of more than £130bn.

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The Bank of England’s latest assessment puts these total losses at an estimated £120bn. The OBR will update its forecasts alongside the Budget later this month.

But the Governor said in his letter that “cash flows associated with QE” offer an incomplete picture of the policy’s impact.

He wrote: “By lowering interest rates, QE supported the economy and improved the terms at which the government could raise debt.”

In her response to Mr Bailey, Ms Reeves said the Bank and Treasury would work together “ensuring that balance sheet operations minimise financial costs and risks to protect public funds”.

Mr Tice said the Bank’s new estimates did not alter the fact that billions of pounds were flowing from the Treasury to Threadneedle Street, comparing the scheme unfavourably to other QE programmes elsewhere in the world.

“The inescapable bottom line is that the UK’s QE program has cost double the ECB’s and treble the Federal Reserve’s, measured as a percentage of GDP, due to decisions made by the Bank of England,” he said.