The Bank of England (BoE) is facing a projected net cost of £170 billion from its quantitative easing (QE) program, equivalent to about 7.5% of the UK's Gross Domestic Product (GDP). This substantial figure is unique among central banks due to three key differences in the BoE's approach. Firstly, the BoE acquired a proportionally larger share of government debt during the QE era, leaving it more exposed to interest rate increases. Secondly, unlike other central banks that typically hold bonds to maturity to avoid immediate capital losses, the BoE is actively selling government bonds, thereby crystallizing losses at current low prices and accelerating its balance sheet reduction. This rapid selling has reportedly pushed gilt yields up by around 0.4%.
Thirdly, the BoE's unique indemnity agreement requires any losses from QE to be immediately covered by the UK taxpayer. Other central banks can treat these costs as internal accounting entries with fewer direct real-world implications for taxpayers. This direct and immediate taxpayer burden, coupled with the active bond sales, has made the BoE's unwind of QE particularly controversial. The BoE's balance sheet has shrunk significantly, reducing its share of UK government debt from 37% in 2021 to 28% currently, a pace roughly twice as fast as the Federal Reserve and the European Central Bank.
Economists have urged the BoE to slow or even halt its bond-selling program, arguing that the rapid pace of sales is deepening losses and pushing up government borrowing costs. Calculations from Oxford Economics and Deutsche Bank suggest that active quantitative tightening (QT) could lead to additional losses of around £10 billion annually compared to simply allowing bonds to mature naturally. Despite these criticisms, the BoE maintains that its current framework, which includes paying a dividend to the Treasury while being recapitalized for QT losses, offers greater transparency, even though it requires money to flow back and forth between the BoE and the government.
