ALBAWABA – The United Kingdom’s (UK) Office for National Statistics’ figures showed Friday that UK taxpayers paid hundreds of millions to cover BOE losses in July, Bloomberg reported Monday.
For the first time on record, losses in Bank of England holdings cost UK taxpayers around $199.08 million (GBP 156 million) last month.
Overall, the government allocated $12.3 billion (GBP 11 billion) in cash to transfer to the central bank in September to cover projected losses in its bond-buying program for the next six months.
According to an update to the ‘Central Government Supply Estimates’ published on August 15 by the Treasury, interest payments on the BOE’s holdings totalled $2.04 billion (GBP 1.595 billion).
Interest payable to investors exceeded the $1.84 billion (GBP 1.439 billion) received in coupon income, resulting in losses to the taxpayers’ money of around $199.08 million (GBP 156 million) in July.
In more than a decade, bond holdings brought in about $153.14 billion (GBP 120 billion) to the Treasury, according to Bloomberg, whose analysis signals a worsening scenario for the BOE. The bank may start selling its bonds next month at a loss, which could exceed $25.52 billion (GBP 20 billion) on an annual basis by next year, according to Bloomberg’s calculations.
The Treasury promised to cover these losses, but it will come out of the taxpayers’ money, the New York-based news agency reported.
Gov’t to carry costs as UK taxpayers paid hundreds of millions to cover BOE losses
September’s shortfall in the public finances comes at the worst possible time for a government trying to find large savings to balance the books. Especially in the wake of a disastrous budget last month that ultimately cost Prime Minister Liz Truss and her Chancellor Kwasi Kwarteng their jobs.
The central bank bought bonds in financial markets to stimulate the economy and limit interest rates under its quantitative-easing (QE) program.
According to Bloomberg, the losses stem from the design of the BOE’s bond buying under its $1.14 trillion (GBP 895 billion) QE program. Reserves of an equivalent amount were created in the form of deposits held by commercial lenders at the central bank.
The central bank pays interest on those reserves at the current bank rate, which is where the issue lies.
Initially, the cost was more than covered by income earned on government bonds bought by the BOE with the money it created.
However, when the BOE raised interest rates, the equation was disrupted and the balance tilted in favour of outgoing payments, instead of incoming revenues.
UK interest rates have increased to 2.25 percent, which is higher than the average coupon income on the gilt portfolio. Gilt funds are investments like ETFs or mutual funds comprised mainly of British government bonds.
If the BOE’s key rates hit 5% next year, as Bloomberg’s analysts expect, interest payments on holdings will be close to $51.05 billion (GBP 40 billion).
Spiralling costs led to speculation that the government may consider changing the rules of the program to mitigate the hit. But the Treasury denies a tweak is coming, the news agency reported.
Coupon income will offset less than half of the interest paid and selling the bonds will also likely incur extra losses as prices are currently much lower than what they were bought for. The recent fall in bond prices has left the remainder of the portfolio of gilts carrying a market loss of about $255.2 billion (£200 billion).
The Office for Budget Responsibility’s forecasts, also based on market expectations, will lay out those costs alongside the government’s next fiscal statement, according to Bloomberg. The final numbers will be impacted by how the OBR treats the bank’s plans to sell its holdings of gilts.
