The UK government is grappling with nearly £45bn in losses from the Bank of England, driven by rising interest rates and bond sales. The financial pressures have led to calls for reforms in monetary policy.
According to the Bank of England’s recent annual report, a substantial transfer of £44.5 billion from the Treasury was necessitated in the 2023-24 fiscal year to cover losses stemming from the central bank’s bond-buying programme. This transfer is part of an indemnity agreement linked to the Bank’s quantitative easing strategy.
Over the last two years, the Bank of England has encountered unprecedented losses due to rising interest rates and the devaluation of gilts on its balance sheet. These gilts are being sold back to investors as the quantitative easing programme winds down. Additionally, increasing borrowing costs have escalated interest payments to commercial banks holding reserves at the central bank.
The Bank anticipates that the cumulative losses from its quantitative easing programme could reach £85 billion over the next decade. Chancellor Rachel Reeves has been urged to amend the Bank’s interest payment system on reserves to mitigate these losses and provide greater fiscal room for government spending.
Despite identifying £22 billion in unfunded spending within this year’s public finances, Chancellor Reeves has indicated no intention to modify the fiscal costs of monetary policy. She expressed concerns about potential disruptions to the transmission of interest rate policy across the economy. Former Prime Minister Gordon Brown and ex-deputy governor Sir Paul Tucker have also supported calls for changes to the interest payment framework.
The Bank’s Monetary Policy Committee (MPC) is scheduled to meet on Thursday to determine the latest interest rate adjustments, with financial markets expecting a close vote on whether to lower the base rate for the first time since 2020. During this meeting, an update on the current pace of bond sales, which are amplifying losses on the Bank’s balance sheet, is also anticipated.
The ongoing quantitative tightening programme, currently set at £100 billion annually, may undergo adjustments starting in September to alleviate fiscal pressures on the government. The Commons Treasury Select Committee recently advised the Bank to adopt a ‘value for money’ approach in reducing its balance sheet to minimise government costs.
In light of these financial strains, the Bank’s governor, Andrew Bailey, declined a 2.5% pay rise for the second consecutive year, maintaining his salary at £495,000. His total compensation package, including pension benefits, amounts to £598,000. Meanwhile, former deputy governors Ben Broadbent and Sir Jon Cunliffe received 2.5% pay increases, bringing their salaries to £296,000. The new deputy governor, Sarah Breeden, has a base salary of £229,403.
The UK’s financial landscape remains under significant stress, with potential policy adjustments on the horizon to address ongoing fiscal challenges.
