A Potential £85 Billion Burden for Taxpayers
The Bank of England's bond-buying program, known as quantitative easing, has been a crucial tool in navigating economic crises. However, recent revisions suggest that taxpayers may soon face an £85 billion bill to cover potential losses on the program's bond portfolio.
Initially, the Bank projected losses of £80 billion over the next decade. However, this figure has fluctuated, with estimates exceeding £100 billion last year. The Bank's insurance agreement with the Treasury stipulates that taxpayers will cover any losses incurred.
The recent surge in interest rates has led to a decline in bond prices, potentially crystallizing future losses for the Bank. Additionally, the interest earned on the Bank's bond portfolio lags behind the interest paid out on commercial bank deposits, further contributing to potential losses.
Analysts propose mitigating the public finances' exposure by paying interest on only a portion of commercial banks' deposits. However, this approach essentially levies a tax on banks, which have benefited from increased loan charges amid rising borrowing costs.
The Bank plans to divest £100 billion of bonds annually, having peaked at nearly £900 billion in government and corporate bonds on its balance sheet. Quantitative easing, despite its potential drawbacks, remains a vital tool for navigating economic turbulence.