The QE programme has built up a cash surplus that the Treasury is taking to reduce new gilt issuance. But if the price of the gilts held by the Bank of England falls, the bank will be left sitting on a loss which the government must pay for.
New analysis out yesterday from Bank of America Merrill Lynch researchers warns the final bill for the Treasury could hit £75bn.
If the “Bank rate remains permanently at 0.5 per cent, and the Bank’s gilt portfolio is allowed to run off as each underlying bond matures, the final profit arising from QE will exceed £150bn,” said analysts.
“If, on the other hand, Bank rate rose sharply from 0.5 per cent to 6.5 per cent between 2015 and the end of 2017 and then stayed at the higher level, this profit would be transformed in the fullness of time into a loss approaching £75bn.”
“Under our worst case but potentially feasible scenario, the Treasury would find itself making payments to the Bank.”
In such an instance the Treasury would find itself cutting borrowing by taking the cash at a time when interest rates are low, then having to borrow more to pay the final bill at a time when rates are far higher. But the QE transfer has still had some short-term benefits – borrowing this year fell an additional 0.8 percentage points as a share of GDP due to the transfer.