The government has been compelled to cover nearly £45 billion in losses incurred by the Bank of England over the past year, raising concerns about the sustainability of current monetary policies.
According to the Bank’s annual report, a transfer of £44.5 billion from the Treasury was necessary in the 2023-24 fiscal year, under an indemnity agreement linked to the central bank’s bond-buying programme.
Over the past two years, the Bank of England has faced unprecedented losses due to rising interest rates and the devaluation of gilts on its balance sheet, which are being sold back to investors as part of the quantitative easing wind-down. Increased borrowing costs have also led to escalating interest payments to commercial banks holding reserves at the central bank.
The Bank estimates that the lifetime losses from its quantitative easing programme could total £85 billion over the next decade.
Chancellor Rachel Reeves has faced calls to amend the Bank’s interest payment system on reserves to mitigate losses and provide more fiscal space for the government. Recently, Reeves discovered £22 billion of unfunded spending within this year’s public finances.
The proposed changes to the interest payments have garnered support from former Prime Minister Gordon Brown and ex-deputy governor Sir Paul Tucker. However, Reeves has indicated no intention to alter the fiscal costs of monetary policy, concerned about potential disruptions to the transmission of interest rate policy across the economy.
The Bank’s monetary policy committee (MPC) is set to meet on Thursday to decide on the latest interest rate adjustments, with financial markets anticipating a tight vote on whether to lower the base rate for the first time since 2020.
Additionally, the MPC is expected to provide an update on the current pace of bond sales, which are accelerating losses on the Bank’s balance sheet. The quantitative tightening programme, currently at £100 billion annually, may see adjustments starting in September, impacting the fiscal pressures on the government.
This year, the Commons Treasury Select Committee urged the Bank to adopt a “value for money” strategy in reducing its balance sheet to minimise government costs.
The annual report also revealed that Andrew Bailey, the Bank’s governor, declined a 2.5% pay rise for the second consecutive year, maintaining his salary at £495,000, with a total compensation package of £598,000 including pension benefits. Former deputy governors Ben Broadbent and Sir Jon Cunliffe received 2.5% pay increases to £296,000, while Sarah Breeden, a new deputy governor, has a base salary of £229,403.
