Policymakers had previously insisted they expected to make money on the £375bn of gilts bought through QE. But, in a study published on Thursday, the Bank conceded there were scenarios under which the Government would have to bear a loss by the end of the decade, reports The Telegraph.
The Bank stressed that QE was more likely deliver a £17bn profit by the time it is entirely unwound, and that the “narrow” measure of the programme’s profitability ignored the wider benefits to the public finances of lower government borrowing costs and larger tax revenues as a result of stronger economic growth.
However, the risk of taxpayer losses will fuel scepticism about QE, which senior Bank policymakers – including the Governor – have warned may no longer be so effective at stimulating growth.
The Bank’s study also showed that the Treasury’s decision last year to seize the excess cash in the scheme would save it “between £65bn and £70bn” by 2016. But the cash transfer would then be reversed between 2017 and 2020, when the Treasury would have to raise extra debt in the market to hand the money back to the Bank.
In an essay in its Quarterly Bulletin, the Bank mapped out a number of scenarios on how the gilts would be sold back to the market.
It used market assumptions that interest rates would rise in early 2016 from their historic low of 0.5pc to 4pc by 2020, and that the asset sales would start in September of that year.
Having previously estimated that just £200bn of QE had depressed gilt yields by one percentage point, the Bank assumed yields would rise by two percentage points relative to base rate once the larger programme started to be unwound. Selling at £25bn a quarter, the Bank would have completely exited QE by 2020.
Under that central scenario, the cash built up through interest payments on the gilts would total £67bn – more than offsetting the £50bn of losses made when the gilts were sold.
However, if yields rose by four percentage points above base rate, the losses made on the sale of the gilts would rise to £75bn, producing a net loss of £8bn to the public finances in 2020.
The Bank said the outcome could be worse as other factors may be at work “such as stresses in financial markets [that] could also reduce the market value of the [QE] portfolio”.
Under a highly optimistic scenario that assumed no effect on gilt yields, the programme would end up £51bn in profit.
“Just altering the single assumption about the reaction of gilt yields to the announcement of asset sales can cause large changes in the results. But it is very difficult to judge which of these outcomes is most likely,” the Bank said.
It added that the scheme’s profit or loss “should not be used as a measure of the success of asset purchases, or of the impact of the scheme on the public sector accounts as a whole”.
“The scheme should instead be judged by the degree to which it meets its aims – to improve corporate credit conditions and boost nominal spending in order to meet the inflation target in the medium term.”