Economists urge John Healey to press Bank to change policy that is costing the exchequer billions of pounds
Economists have urged the chancellor, John Healey, to press the Bank of England to slow down its bond-selling programme that has already cost the exchequer billions of pounds.
The Bank’s monetary policy committee (MPC) meets this week to not only decide the level of interest rates but also whether they should freeze or slow the sale of government bonds, known as gilts, bought as part of the rescue operation after the 2008 banking crash.
That process was known as “quantitative easing” (QE), and over the past four years the Bank has been reversing it through “quantitative tightening” – selling the debt back to the market – to help reduce inflationary pressures.
However, the bonds are now worth less, so selling them crystallises losses to the exchequer while increasing the supplies to the market – suppressing demand and pushing up the interest rate, or yield, charged on the debt.
The cost of government borrowing is already at multi-decade highs owing to the turmoil on financial markets as the Middle East conflict drives up the oil price. On Monday the yield on the benchmark 10-year gilt passed 5. 4%, its highest level since July 2007, while the 30-year rose to 5. 93%, its highest level since March 1998.
In August the Bank estimated its QT stance could result in total losses to the exchequer of £120bn if interest rates remain on the path expected by financial markets.
Its governor, Andrew Bailey, has defended the policy, telling parliament’s Treasury committee earlier this year that it was not in the MPC’s remit to limit costs to the government in the short-term.
Bank officials have signalled that bond sales will continue, though at a slower rate than expected earlier this year.
Critics have accused Threadneedle Street of ignoring the escalating bill its policy is creating for Healey before his first budget next month.
Louise Haigh, the Cabinet Office chief who managed Andy Burnham’s campaign to be an MP, has previously pledged to stop Bailey from “pursuing policies that actively damage the government’s balance sheet”.
It is understood that Healey has rejected such calls from inside the cabinet to take a hard line with the Bank when he issues its new remit, preferring to accept assurances that it will be mindful of heaping extra losses on the Treasury.
Charlie Bean, a former deputy governor of the Bank of England, said: “I do not think it is politically sustainable for the MPC to be able to take such decisions without the involvement of the [Treasury] or else somehow reduce the magnitude of spillovers [to the Treasury].”
John Llewellyn, a partner at the consultancy Independent Economics and a former chief economist of the OECD, said the idea that there was a firewall between the Treasury and the central bank was a “fiction” and Bailey should expect to negotiate with the chancellor to minimise costs.
Since active sales of QE bonds began in late 2022, the Bank has overseen one of the fastest reductions in central bank bond holdings among advanced economies, cutting the portfolio from a peak of £875bn to under £490bn.
A year ago it cut its annual target for sales from £100bn to £70bn and is expected to lower that again this week to £50bn. The US Federal Reserve stopped actively selling its portfolio of bonds last year.
Christopher Mahon, a senior fund manager at Columbia Threadneedle Investments, and a visiting fellow at the Open University Business School, said rising costs showed the Bank “should scrap active sales outright”.
He said the Bank’s methods had proved to be twice as expensive as the European Central Bank’s and four times as expensive as the US Federal Reserve programme, mainly due to the type of bonds it bought, which have collapsed in value since 2008.
The Office for Budget Responsibility (OBR), the Treasury’s independent forecaster, has estimated the Bank’s bond sales will add about £47bn to government debt by 2031, assuming active gilt sales of £32bn a year.
The Treasury and the Bank of England declined to comment.