The Bank of England (BoE) said the broader benefits of its government bond-buying program help counterbalance the sizable losses now crystallizing on its balance sheet, a politically sensitive issue because His Majesty’s Treasury indemnifies those losses.
The BoE revised its standard estimate of the net lifetime loss arising directly from quantitative easing (QE) to a range of £60 billion to £120 billion, depending on how interest rates evolve. That compares with an August projection of £55 billion to £115 billion, reflecting market moves since the summer and the ongoing unwind of the portfolio. Governor Andrew Bailey conveyed the updated figures in a letter to Finance Minister Rachel Reeves, while stressing that QE’s broader effects extend beyond the direct accounting transfers between the Treasury and the BoE’s Asset Purchase Facility (APF).
The central bank emphasized that QE, conducted between 2009 and 2021, was designed to meet the BoE’s 2% inflation mandate during periods of acute stress, not to finance government spending. Even so, the scale of the operations and the subsequent rise in interest rates have generated marked mark-to-market losses as gilt prices fell and the BoE paid higher interest on the reserves created to fund the purchases. The new estimate reflects that reality while setting it against the program’s wider fiscal and macroeconomic repercussions.
Issuance Savings Offset Costs
A key element of the BoE’s analysis is that QE lowered the government’s borrowing costs, enabling the UK Debt Management Office to issue bonds more cheaply over many years. The BoE quantifies these fiscal savings at £50 billion to £125 billion, a range that it says “significantly, or fully” offsets the direct net lifetime transfers from the Treasury to the APF under the indemnity. The assessment does not include QE’s support to growth and tax revenues, which the BoE argues would further improve the overall fiscal calculus. Bailey wrote that, taken together, these effects likely compensate for the headline losses now drawing public scrutiny.
The bank also reiterated that the accounting view of QE can obscure the counterfactual: without large-scale purchases during crises such as the global financial crisis and the pandemic, gilt yields would likely have been higher, financing conditions tighter, and the downturns deeper. In that scenario, the Treasury could have faced higher debt-service costs and weaker revenue even absent an APF indemnity. While the BoE did not attempt to model every channel in its latest note, the quantified issuance savings are presented as the most concrete offset to the £60 billion–£120 billion direct loss range.
Portfolio Shrinkage and Policy Rationale
The BoE’s gilt holdings peaked at £875 billion during the COVID-19 crisis, funded by the creation of bank reserves on which the BoE pays its policy rate. With policy rates now much higher than during the purchase phases and gilt prices correspondingly lower, the APF is realizing losses as the portfolio is reduced. The central bank is advancing that reduction through quantitative tightening (QT), a combination of maturities being allowed to run off and active sales. Officials argue that shrinking the balance sheet is necessary to rebuild policy space for future shocks and to restore a more neutral market footprint after more than a decade of extraordinary support.
The mechanics matter for the fiscal channel. Paying interest on reserves at the policy rate was integral to maintaining monetary control with a large balance sheet. As that rate rose to combat inflation, interest paid to banks holding reserves increased, widening the gap between APF income and outgoings and thus enlarging Treasury transfers under the indemnity. The BoE’s latest framing seeks to situate those flows within the full cost-benefit picture, which includes years of cheaper issuance costs and the stabilization achieved when QE was deployed.
Political Debate Over Bank Reserves
The mounting transfers have spurred proposals from some economists and politicians to curb or halt interest payments on reserves as a way to limit public-sector outlays. The BoE has rejected that idea, warning it would undermine monetary policy transmission and risk distorting money markets. Chancellor Rachel Reeves has likewise indicated she has no plans to alter how the BoE remunerates reserves, maintaining the framework that underpins interest-rate control in a floor-system regime.
Behind the politics sits a longer-running debate over how central banks should structure balance sheets in a world of ample reserves. The BoE’s position is that the policy effectiveness of paying interest on reserves outweighs the optics of transfers during periods of high rates. As inflation falls and policy rates eventually normalize, interest paid on reserves, and the associated fiscal transfers, would also adjust. For now, the bank’s message is that the headline losses on QE need to be weighed against the measurable issuance savings and the unquantified, but material, macroeconomic support provided at moments when market functioning and confidence were at risk.
