UK Taxpayers to Cover £150 Billion in Bank of England Losses from Quantitative Easing

The Bank of England’s (BoE) quantitative easing (QE) program has racked up staggering losses, with UK taxpayers expected to cover £150 billion, according to new estimates. This sum, revealed in the BoE’s Asset Purchase Facility Report for Q4 2024, is equivalent to funding the UK’s entire defence budget for two and a half years.

How Did We Get Here? Understanding QE and Its Costs

Quantitative easing was originally introduced in 2009 during the financial crisis as an emergency measure to stabilise the economy. By purchasing government bonds (gilts) and corporate debt, the BoE injected liquidity into financial markets, keeping borrowing costs low and supporting economic recovery. The policy was expanded significantly during the COVID-19 pandemic, with the BoE buying £895 billion worth of assets to prevent economic collapse.

However, QE has a major downside, when interest rates rise, the value of bonds held by the BoE declines, leading to large unrealised losses. Now that the BoE has started unwinding its bond holdings in a process known as quantitative tightening (QT), those losses are being realised, leaving taxpayers to foot the bill.

Why Are UK Taxpayers Paying for These Losses?

Under the QE framework, the UK Treasury and the Bank of England agreed that any profits or losses from asset purchases would be transferred to the government. During years of low interest rates, QE generated billions in profits, which were sent to the Treasury and used to reduce public borrowing. But with interest rates now at their highest levels in over 15 years, the situation has reversed, forcing the Treasury to cover the BoE’s losses.

According to the latest estimates, the total cost to taxpayers could exceed £150 billion as the BoE continues selling off its bond portfolio at lower values than they were purchased. These losses represent a significant burden on public finances, equivalent to:

• More than two years of the UK’s entire defence budget
• The cost of building 600 new hospitals
• A one-off £2,200 tax rebate for every UK household

The Bigger Picture: Rising Interest Rates and Government Borrowing

The BoE’s QE losses come at a time when the UK government is already struggling with high borrowing costs due to higher interest rates. With inflation still above target, the BoE has kept rates elevated, increasing the cost of servicing the national debt. In 2023 alone, interest payments on government debt surged to over £110 billion, putting further strain on public finances.

Critics argue that the long-term costs of QE were underestimated and that the BoE should have acted sooner to unwind its balance sheet when market conditions were more favourable. Others defend QE as a necessary tool that prevented economic collapse during the financial crisis and pandemic, despite the current financial fallout.

What’s Next for the UK Economy?

With the BoE continuing to offload bonds and interest rates unlikely to drop significantly in the near future, the QE losses will remain a key challenge for the UK government. Chancellor Jeremy Hunt has acknowledged the strain on public finances but insists that the economy is on the path to recovery. Meanwhile, opposition parties have criticised the handling of QE, calling for greater transparency on the long-term implications for taxpayers.

As economic uncertainty continues, UK investors and businesses must navigate an environment of higher borrowing costs, potential spending cuts, and increased market volatility. The question remains, was QE a lifeline that saved the UK economy, or a financial burden that future generations will continue to pay for?

(Sources: Bloomberg.com, ChatGPT)