Bank of England Forecasts £150 Billion Net Loss Over Next Decade in QE Unwinding

(CTN News) – The Bank of England’s recent forecast has raised significant concerns as it predicts a net loss of over 150 billion pounds ($193 billion) over the next decade due to unwinding its quantitative easing (QE) gilt purchases.

This projection indicates a higher loss than estimated in April, requiring government funding when public finances are strained by escalating interest rates and inflation.

Prime Minister Rishi Sunak’s Conservative Party members are pressing for tax cuts ahead of the 2024 election, adding further complexity to the economic landscape.

Unwinding Quantitative Easing: The Bank of England’s Projection:

The QE program, initiated in 2009 to stimulate the economy after the global financial crisis, led the Bank of England to purchase 875 billion pounds of British government bonds by 2021.

However, as the Bank begins to unwind these purchases, it foresees a significant net loss, necessitating government financial support. The forecasted loss has been revised from 100 billion pounds in April to just over 150 billion pounds over the next ten years.

Funding the Bank of England’s projected losses burdens the government’s already strained finances. The obligation to cover these losses comes when rising interest rates and inflation impact the nation’s economy, posing challenges to maintaining a stable fiscal position.

Impact of Rising Interest Rates and Inflation:

The surge in interest rates and inflation adds to the government’s complexities. With higher interest payments, the government faces increased financial pressure, potentially hindering its ability to address other pressing economic priorities.

Despite the financial challenges, some Prime Minister Rishi Sunak’s Conservative Party members advocate for tax cuts before the likely 2024 election. This proposal adds to the delicate balance the government must strike between stimulating economic growth and managing fiscal responsibilities.

Government’s Financial Obligations: In the immediate future, the Bank of England expects the government to pay around 40 billion pounds per year in 2023, 2024, and 2025. This amount is approximately 10 billion pounds more annually than the previous estimate in April, further straining government resources.

Since its inception, the QE program has seen the Bank of England buy government bonds, while the finance ministry effectively received the interest payments on these bonds. However, the government agreed to compensate for any potential shortfall to protect the Bank from future losses.

Factors Influencing BoE’s Projections:

The Bank of England’s forecasts are highly sensitive to fluctuations in financial markets, particularly interest rate expectations. Additionally, the pace of selling the 875 billion pounds of government bonds acquired between 2009 and 2021 significantly affects the projected losses.

Managing Gilt Holdings and Financial Markets’ Impact: To mitigate losses, the Bank of England has already reduced its gilt holdings to just over 800 billion pounds through a combination of outright sales and not reinvesting proceeds from maturing gilts. Nonetheless, the unpredictability of financial markets remains a factor in the overall projections.

Alternative Scenario: Lowering Losses through Interest Rates: An alternative scenario, wherein interest rates revert to a lower 2-3% equilibrium level as estimated in 2018, suggests reduced losses of just over 100 billion pounds. However, this figure surpasses the earlier April forecast by more than 50 billion pounds.

Conclusion:

Balancing Economic Challenges with Government Liabilities The Bank of England’s forecast of substantial losses as it unwinds its QE gilt purchases poses a significant challenge for the government, requiring careful management of public finances amid rising interest rates and inflation.

As the nation navigates economic pressures, finding the right balance between addressing immediate needs and long-term fiscal responsibilities will be crucial for financial stability and growth.