2023-04-29 16:24:56
DThe Bank of England expects losses in the three-digit billion range from its bond purchase program because interest rates have risen and prices have fallen. By 2033, net losses will grow to £100 billion in the central scenario. The Ministry of Finance will have to transfer this sum to the central bank by then, according to a new forecast contained in the quarterly report on the so-called “Asset Purchase Facility” (APF).
From the beginning of the “quantitative easing” program in 2009 until the end of 2022, the Bank of England had made profits on the bonds it bought, partly from interest, partly from price gains, and paid them out to the Treasury on an ongoing basis. The central bank speaks of a cumulative £123.8 billion by the end of September. However, the turnaround in interest rates will now change the picture.
At the end of March, the Bank of England held £824 billion worth of bonds from its APF purchase programme. Since last year, it has gradually started to sell bonds and thus slowly reduced its holdings. Securities are said to be sold for £80 billion each year.
A mix of falling interest income and price losses
The bank’s cash flow losses are calculated from the combination of declining interest income and price losses, since it sometimes bought the bonds at much higher prices than the current value. In ten years, the losses could have become so large that the bottom line – i.e. including the previous £123.8 billion profits – is a loss of around £100 billion.
The Bank of England emphasizes in its report that “looking forward, future cash flows are uncertain and highly sensitive” to anticipated future market interest rates and the pace of portfolio reduction. In a scenario with higher interest rates, the central bank calculates a hypothetical net loss that is significantly higher by 2033. The main scenario, however, is the assumed net loss of £100 billion.
The payments that the London Treasury will make to offset the losses do not worsen medium-term budget planning. A loss of £100 billion was included in the Office for Budget Responsibility’s latest budget estimates for the Treasury.
In contrast to the British case, the European Central Bank’s (ECB) bond-buying program does not envisage direct compensation payments from government budgets for losses. If there are losses from the ECB purchase program, however, they reduce the profits of the central banks of the Eurosystem, including the Deutsche Bundesbank with a share of around a quarter. As a result, the transfers from the central banks to the national budgets will also decrease, so that losses will indirectly affect taxpayers.
#British #central #bank #expects #high #losses