Taxpayers face £85bn bill as Bank of England projects losses on bond sales

Britons could soon shoulder the burden of an £85 billion bill as the Bank of England reviews its estimates of losses on bond sales suffered during financial and pandemic turmoil.

Initially predicting £80 billion in losses, the Bank now expects a higher amount for losses on its bond portfolio, known as the asset purchase facility, over the next decade. However, this estimate has fluctuated; Last year the company expected losses of more than £100 billion.

Taxpayers are ready to cover potential losses under an insurance agreement entered into between the Bank and the Ministry of Finance when the asset purchase program started fifteen years ago.

While the Bank made significant profits of £123.8 billion during the first fifteen years of the program and channeled this money into the Treasury, recent developments indicate a shift. A rise in interest rates, aimed at curbing inflation, has led to a fall in bond prices, potentially crystallizing future losses for the Bank. Moreover, the interest on the Bank’s bond portfolio lags behind the interest paid on deposits of commercial banks.

Analysts propose limiting the exposure of public finances to interest rate fluctuations by paying interest only on a portion of commercial banks’ deposits. However, this approach essentially imposes a tax on banks, which thrive on higher borrowing costs amid rising borrowing costs.

Currently, the Bank plans to divest £100 billion of bonds annually, peaking at almost £900 billion of government and corporate bonds on its balance sheet.

Quantitative easing, the nickname for the bond-buying program, aimed to stimulate the economy by lowering interest rates and injecting liquidity into banks. It was deployed during the 2008 financial crisis, the pandemic and briefly after Liz Truss’s mini-budget. It remains a crucial tool in dealing with economic turbulence.