MPs sound alarm over fiscal cost of unwinding quantitative easing

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The chancellor should have a bigger say on how the Bank of England unwinds its £895bn bond-buying programme, according to a report by MPs that raises questions about the central bank’s independence.

The Commons Treasury committee on Wednesday said it was concerned potential losses on the scheme as the BoE wound down its bond holdings — amassed between 2009 and 2022 to support the economy after successive shocks — could have big implications for public spending.

This was partly because the pace at which the BoE conducted quantitative tightening could affect losses in a given year, even if it did not change the lifetime cost of the scheme.

It was also because quarterly transfers between the Treasury and the central bank — the mechanism by which the government indemnifies the BoE against losses — affect chancellor Jeremy Hunt’s ability to hit his fiscal rules.

The committee said: “Notwithstanding the operational independence of the monetary policy, it strikes us as highly anomalous that decisions have been and are being taken concerning huge sums of money without any regard to the usual value-for-money requirements.”

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The cross-party group called on the BoE and Treasury to explore ways to factor value-for-money criteria into decisions on the pace and timing of quantitative tightening.

The MPs also urged the finance ministry to examine whether its transfers to the bank should be excluded from the debt targeted by the fiscal rules, saying the current system held “worrying implications for public spending, taxation and borrowing, and for the operational independence of monetary policy”.

The quantitative easing programme generated profits for the government until 2022 but has since incurred much heavier losses than were expected at the outset, because the BoE began reducing its bond holdings while sharply raising interest rates to tame inflation.

The eventual cost of the scheme remains highly uncertain. When the Treasury committee finalised its report, the latest official estimate was that the programme would cost about £130bn over its lifetime.

On Tuesday, however, the BoE released updated estimates based on current market expectations for the path of interest rates. Because investors are now betting on earlier rate cuts, the central bank’s projections now show an overall lifetime cost of £80bn.

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Officials and economists who gave evidence to the committee also underlined that QE’s effect in stabilising the UK economy after big shocks meant the overall fiscal impact was likely to be “highly positive”, despite the direct financial costs incurred as the scheme was wound down.

The indemnity system was put in place at the outset of QE precisely in order to ensure that monetary policy was not constrained by risks to the central bank’s balance sheet.

Giving the chancellor a say in decisions on the winding-down of bond holdings would be controversial because it affects the BoE’s overall monetary stance, even though the central bank has made it clear it wants interest rates to be the main tool for controlling inflation.

But the committee said the extent to which QE had boosted the economy — especially in its latter rounds, after the Brexit referendum and Covid — was still unclear.

It also underlined its concern at the potential for the BoE’s ongoing sales of gilts to unsettle markets, calling QT “an untested intervention in a gilt market that is also faced with an unusually high sustained rate of conventional gilt issuance”.

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The BoE plans to cut its bond holdings by £100bn in the second year of QT, following the first year’s £80bn reduction, taking them to £650bn by September 2024. The government’s gross financing requirements for the next financial year are forecast at £277bn, 16 per cent up on this year.

The BoE said it would consider the committee’s findings carefully before responding and continued “to encourage active debate about our monetary policy decisions and their implementation”.

The government said it was “important that the Treasury underwrites the Bank’s asset purchases so it can meet its monetary policy objectives”.

More than £120bn had been transferred to the Treasury from the BoE between 2012 and 2022 but “it was always expected that losses would be incurred when this was unwound and any future gains or losses are highly uncertain”.