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Taxpayers will have to foot a £130bn bill over the next five years to cover the Bank of England’s (BoE) losses stemming from its bond-buying programme, a burden that critics are describing as a “stealth subsidy to bankers.”
The Treasury will need to inject this significant sum to offset the BoE’s cumulative losses from rising interest rates and the unwinding of its quantitative easing (QE) programme.
The BoE’s indemnity agreement with the Treasury will cost taxpayers £130bn from 2025 to 2029 — an average of £26bn per year, according to the Bank of England’s latest Asset Purchase Facility Quarterly Report - 2024 Q4. The New Economics Foundation (NEF), has said this amount could fund over half a million new social homes.
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The BoE's bond-buying initiative, which began after the 2008 financial crisis, was designed to stimulate the economy by purchasing UK government and corporate debt from financial institutions. This policy, intended to push down yields and encourage borrowing, has now resulted in substantial losses due to the rise in interest rates. Under the terms of the arrangement, while the BoE channels any profits back to the Treasury, taxpayers are left responsible for covering any losses.
In the years following the crisis, ultra-low interest rates enabled the BoE to generate a windfall for public finances, but that has reversed in recent times. Rising interest rates mean that the interest the BoE earns on bonds purchased under QE is now lower than the interest it pays on the reserves used to purchase those bonds. As bond prices fall in response to higher interest rates, the value of those bonds has plummeted. Some recent bond sales have fetched as little as 28% of the original price, exacerbating the scale of the losses.
The indemnity was initially agreed in 2012 by then-chancellor George Osborne, when QE was generating profits, allowing the Treasury to receive nearly £125bn from the BoE between 2012 and 2022. However, this dynamic has reversed in the past two years, with losses exceeding £70bn charged to the Treasury.
The NEF has suggested that the cost could be reduced by implementing a system of tiered reserves, which would require banks to hold a portion of reserves that are unremunerated. This could cut the interest paid to the banking sector by up to £11.5bn annually. Slowing down the process of quantitative tightening (QT), including halting active bond sales, could save another £13.5bn each year. Also, the NEF advocates for reforming the relationship between the Treasury and the Bank, suggesting the BoE should absorb more of its own losses, potentially saving £26bn per year.