The Bank of England wants to make a loss of £150 billion so that governments will be forced to cut spending. That is the real banking scandal of our time.

Posted on

A number of people have asked me to comment on this article in the FT from a few days ago:

To do so I have prepared a summary of the accounts of the company called the Bank of England Asset Purchase Facility Fund Limited (or APF) that actually operates the quantitative easing programme on behalf of HM Treasury, because it is a sham to say that it is run by the Bank of England when the Treasury has to approve all major decisions made by this company and bears the profits and losses arising from its actions. That summary looks like this, covering all years from 2010 when it began to trade:

My suspicion is that this will be a little hard to read, although clicking on it a couple of times should produce a much bigger version. So, let me offer this summary version instead:

What is now on display are the accounts for 2022 and 2023 plus a summary of all year's income and expenditure to both 2022 and 2023.

Several points stand out:

  • £125 billion of interest costs have now been saved as a result of QE
  • Until 2022 the operation of QE was profitable in every year
  • It was only in 2023 that QE turned from having been a very profitable exercise int being a loss-making one.
  • In 2023 a loss of £169 billion was made on QE operations.
  • That loss was almost entirely due to the value of the investments held by the APF being reduced in value on its balance sheet. There was no actual cash loss in the year.

So, why did this loss happen? That is explained by this innocuous-looking note on accounting policies included in the accounts:

What that note, in effect says is that the financial instruments - in this case, all the government bonds that the APF owns - are valued at what is, in effect, their market value at the APF's balance sheet date.

Note 5 to the accounts adds a little information:

The note is as misleading as it is helpful. The reference to the cash flow is actually to a non-cash movement, and so is not very helpful. What was required was a breakdown in the reduction in the value of assets split between the value written off and sales made. In the absence of this data in the accounts, it is very likely that the split was:

The diminution in value was then because of asset sales under the quantitative tightening programme, which could have resulted in some real losses arising, and, much more significantly, the accounting write-down of the value of the portfolio.

As is now clear from total trading of the portfolio to date, including these losses, is that overall if the fund were to be sold at current values, then to date, the whole quantitative easing operation would have resulted in losses of around £150 billion.

So the question to ask is whether that is a fair representation of what will actually happen? Will the Bank of England really lose £150 billion on behalf of the Treasury, and why?

The answer is that I cannot say whether that is the case or not, because it depends upon the decisions that the Bank of England makes. There are three that matter:

  • Will it keep rates as high as they are now for the time being, or even increase them further?
  • Will it let them fall to a natural rate of 2% or less, which is what the economy clearly needs when inflationary pressure is over, which it will be within a couple of years at most?
  • Will it insist on selling large parts of its bond portfolio at a loss as it is now doing even though there is no need for it to do so?

Those three points need unpacking.

First, it would seem that the Bank of England has now got a deathwish with regard to interest-rate policy, and even the Treasury is now becoming worried that the increases in interest rates that they are pursuing will be harmful to the economy. I can only hope that they bring pressure to bear on the Bank to stop this policy of increasing rates, which is now one of pure folly.

Similarly, I hope that whoever is in office as Chancellor of the Exchequer at the end of 2024 will likewise bring pressure to bear on the Bank to reduce interest rates rapidly at that time to ease the pressure on the economy when there will by then be no evidence of any benefit to arising to it as a consequence of maintaining the high-interest rates that the Bank of England does at present indicate that they wish to remain in place.

Third, if I was to get my wish on interest rates, then the current policy of the Bank of England, which is to sell as many of the gilts in its portfolio as it can at present values is a further example of its pure financial folly. That is because when interest rates are higher in the marketplace than when the gilt was issued, then the value of that gilt does, in current terms, fall. The eventual redemption value of the gilt does not, however, change. In other words, if the investor holds the gilt to the end of its life then they will get back exactly what they were promised. So if they don't sell, they will not make these losses.

Let me use a quick example of a ten-year bond issued last year with an interest rate of 3.25%. The data is here:

This bond was issued at a discount to its £100 par value, which is common.

The price at which it has traded has varied from £101 to £89 over the time it has been in issue. Right now, it is nearer the bottom end of the scale.

If the Treasury had bought this on issue, it would now be sitting on a loss. If it sold now, that loss would be real: whoever bought it would in effect buy it at an undervalue compared to the issue price. There would be a transfer of value from the Treasury to the private sector.

But there is no reason for the Bank of England to sell now, except for its wholly unnecessary quantitative tightening policy. If it held it until 2033 it would get £100 back. It would lose nothing.

So, in that case, why is the Bank claiming a loss of £150 billion? Four reasons:

  • It is wholly unwisely putting up interest rates.
  • It wants to keep interest rates high.
  • It wants to sell bonds at a big loss to keep interest rates high.
  • It is doing this because it seemingly wants to trash the economy whilst providing asserts at an undervalue to financial markets.

It is, in other words, incompetence that is driving this loss. It is not needed. It does not have to happen. It may not happen. It just requires sanity to be restored to our central bank to stop it happening. But will that happen? Who knows?

What I do know is that the Bank is recklessly seeking to make losses to prevent the government from spending money to meet social need. And that is the real banking scandal of this moment.


Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:

You can subscribe to this blog's daily email here.

And if you would like to support this blog you can, here: