Bank of England makes £3.8bn profit from Liz Truss mini budget bond sales
The Bank of England has trousered £3.8bn in profits from ditching bonds it hoovered up to stem financial chaos caused by Liz Truss’s calamitous mini-budget, the central bank told City A.M.
The Bank announced today it has ditched all the £19.3bn of gilts purchased last autumn to stabilise the UK debt market.
Governor Andrew Bailey and co will not pocket the profits themselves. Instead, the earnings will flow to the treasury.
Truss’s £45bn of unfunded tax cuts last September sent markets wobbling at the prospect of being asked to absorb a huge upsurge in government borrowing.
Just weeks after the announcements, the pound sank to its lowest level ever against the US dollar and UK debt costs hit their highest level in two decades.
Traders demanded a better return on UK assets – such as gilts – to take on more borrowing to pay for Truss’s tax cuts. Bond prices tanked, sending yields sharply higher. The pair move inversely.
The Bank stepped in with an up to £65bn emergency bond buying package on 28 September days after the mini-budget which ended on 14 October.
“The purchases were made to restore orderly market conditions following dysfunction in the UK gilt market, and in doing so reduce risks from contagion to credit conditions for UK households and businesses,” the Bank said in a statement today.
It did not use anywhere near the entire amount available, but just signalling it would prop up the bond market shored up investor confidence. Over £45bn of purchases were left untouched.
The Bank of England has been purchasing government debt since the financial crisis to keep interest rates low and stimulate demand in the economy.
Profits have flowed back to the treasury, helping the UK’s finances.
However, when the Bank makes a loss on its purchases, the treasury steps in to cover losses under an insurance agreement between the two.
That has raised concerns over whether taxpayers could eventually be left paying the bill, especially now global interest rates are rising.
The £3.8bn figure is an initial estimate by the Bank which may be revised, City A.M. understands.