State could end up with big QE profit

If interest
rates stay low the Treasury could be in line for a £50bn windfall

The losses suffered by the Bank of England as a result of unwinding its quantitative easing programme could be relatively modest and the Government could end up registering a significant profit from the programme, research by the central bank suggests.

An article in the Bank’s Quarterly Bulletin published today shows that even if market interest rates rose by around 400 basis points – 4 per cent – the Bank would only be facing an £8bn loss as a result of selling off its portfolio of gilts by the end of the decade. And if interest rates remained at the present low levels for the rest of the decade the Treasury would be in line for a £50bn windfall.

The Bank has accumulated £375bn in UK government bonds, known as gilts, since it commenced its unorthodox monetary stimulus programme under the outgoing Governor, Sir Mervyn King, at the height of the recession in March 2009. Many had assumed that the central bank would inevitably register big losses on these purchases when gilt prices fell and the Bank began to sell its stock back into the market. However, the Bank’s research suggests that gilt prices would have to fall very significantly for a major hole to open up in the central bank’s balance sheet.

Last November the Treasury announced it would be requiring the Bank to hand over the cash coupon payments accrued to its stock of gilts, which it would use to lower the annual government deficit. Some £35bn will be transferred by the end of this year. But the Government also pledged to transfer cash back to the central bank in order to cover its losses when it comes to sell off the gilts.

The Bank research shows that if it commences the sell-back in 2016 at a rate of £25bn a quarter and market interest rates rise by 200 basis points in response (which is equivalent to the downward shift in interest rates when the buying started in 2009), the Treasury will still be transferring billions of pounds annually back to Threadneedle Street by the end of the decade. And these payments will reach more than £40bn by 2019 as the gilt stock is gradually cleared. However, on this scenario, the Treasury would have registered a net profit over the life of the QE scheme of £20bn. If market interest rates fail to rise in response to the sell-back, the Government’s net profit will be £50bn.

The Bank’s researchers stressed that the QE programme should be judged by whether it had helped the economy, rather than whether it made a profit or loss for the state.

Sport
The sun rises over St Andrews golf course, but will it be a new dawn for the Royal and Ancient Golf Club?
sportAnd it's Yes to women (at the R&A)
Arts and Entertainment
Friends is celebrating its 20th anniversary this year
tvSeries celebrates 20th anniversary
Sport
Yaya Touré (left) and Bayern Munich’s Spanish defender Juan Bernat
footballToure's lack of defensive work is big problem for City
Voices
voicesApple continually kill off smaller app developers, and that's no good for anyone
PROMOTED VIDEO
Arts and Entertainment
Liam Neeson said he wouldn't
tv

Liam Neeson's Downton dreams

Sport
Wembley Stadium
footballNews follows deal with Germany
Arts and Entertainment
A spell in the sun: Emma Stone and Colin Firth star in ‘Magic in the Moonlight’
filmReview: Magic In The Moonlight
News
ebooksAn unforgettable anthology of contemporary reportage
Sport
A 'Sir Alex Feguson' tattoo
football

Arts and Entertainment
Ben Whishaw is replacing Colin Firth as the voice of Paddington Bear
tv

Thriller is set in the secret world of British espionage

Life and Style
life

News
ScienceGallery: Otherwise known as 'the best damn photos of space you'll see till 2015'
Life and Style
fashion

Bomber jacket worn by Mary Berry sells out within an hour

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Audit Manager Central Functions

To £85,000 + banking benefits: Saxton Leigh: You will be expected to carry out...

Credit Risk Audit Manager

Up to £90,000 + benefits: Saxton Leigh: Credit Risk Audit Manager required to ...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week