Unwinding Quantitative Easing (QE) is currently costing the public a great deal of money. Nearly £50 billion (almost 2% of UK GDP) has been transferred from the Treasury to the Bank of England to cover losses as the Bank unwinds QE (called Quantitative Tightening) since October 2022. That is real money that might otherwise have been spent on improving hospitals, schools etc. (Figures from the latest OBR forecast here, page 120.) It is true that before that QE made the government much bigger profits, but the OBR estimates that once all QE is unwound the net loss will be around £100 billion.
One of the reasons discussion of this has tended to be confined to pages in the Financial Times (see here for example) is that, as with most things finance related, the issue can often get needlessly complicated. In this post I’ll try and make things simpler, and ask whether these losses can be avoided and if not, who is to blame.
First, a reminder of what Quantitative Easing is and why it happened. It involves the Bank of England buying huge quantities of government debt, and paying for this by creating (electronic) money called ‘reserves’ which are held by the major banks. Most of this was done during the recession years after the financial crisis (GFC), but some happened during the pandemic.
Why did the Bank do this? After the GFC the main policy instrument of the Bank, the short term interest rate, was stuck at its lower bound, so instead the Bank was trying to stimulate the economy by putting downward pressure on longer term interest rates. By buying lots of longer term assets like government debt, it hoped it would push up the price of that debt.
