People are worrying that QE will leave the UK exposed to considerable interest costs because something like £800bn is now owed as a result of QE to the UK's commercial banks and building societies. But the interest cost of that is, right now, about £800 million a year which vastly less than the £24 billion that the government might have budgeted to service debt of that amount, and even if interest rates rise to the level forecast by the Office for Budget Responsibility over the next five years the savings will still be £20 billion a year. Whatever else QE does, it certainly saves the UK a great deal of money, which can be better used.
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I agree with the thrust of the video – there is nothing to worry about with regard to QE, rising rates etc.. However, I don’t agree with you regarding to “savings” on interest payments.
I think you imply that because the average interest rate paid on the debt is 3% then QE reduces interest costs by 2.9% (3% minus 0.1%). Not true (economically). The correct calculation is 0.4% – the average YIELD on the gilts (say, 0.5%) purchased via QE less the 0.1% paid on reserves. Remember, QE purchases gilts at market prices not par…. but gilts redeem at par.
The interest costs reflect the historic coupon levels on previously issued gilts and will go down next year as (for example) the 8% 2021 mature and are refinanced with a bond with a coupon of (say) 0.5%. In that sense, falling debt servicing costs are “baked in” for the next 5 to 10 years (as you are surely right about the prospects for interest rates in the next decade)… and for those that fret about debt servicing costs (not me) this should be a comfort.
If the government spends money into existence (QE or not) the cash will appear in reserves held by commercial banks at the BoE and it will cost whatever the interest rate paid on reserves is for as long as the money exists (probably forever). But this rate is controlled by government and could be zero (even negative?) for as long as it wants. If rates DO go up at some point in the future it will be due to a conscious decision that, for the country as a whole, the benefits of higher rates would outweigh the extra interest costs paid on reserves. Policy rates are chosen, not given.
I am referring to central bank reserves – which have funded all government borrowing this year – and they pay 0.1%. Hence my argument. Right now gilts are largely a roll over mechanism, not a source fo funding, I would suggest
I think we are on the same page on this one. I agree that, whatever circuitous route one follows (QE etc.) the “cost” is merely the rate paid on reserves – which is small. Indeed could be zero if the government wished and is a rate entirely within government control.
I may have misunderstood you, sorry (but if I have then I suspect that others will have, too) but my concern was that at the start of the video you take an interest payment number (£56bn or £44bn after BoE holdings taken off)) and impute an average rate (3%) and then use that rate as the “apparent cost”…. before arguing that the true cost is 0.1%. The TRUE cost IS 0.1% (rate paid on reserves) but to have any meaning this should be compared against today’s yields not historic coupon rates.
Ok
I was merely taking a nominal cost
I accept your points