Let’s get one thing straight: the Bank of England is not going to lose £65bn on buying government debt.
There’ve been a few social media posts (and a few newspaper headlines) whipping up this point. It’s untrue.
Last week, the Bank said it will buy up to £65bn worth of long-dated government debt until 14 October. Some £5bn worth of purchases is the daily cap.
On the first day the package went live, the Bank purchased around £1bn worth of these bonds. Today, it purchased zero.
On that trajectory, the Bank would buy around £2.5bn of gilts. The central bank has spent £3.5bn so far.
But, even if this package hit its ceiling, the Bank would still not have lost billions of pounds of the UK’s money.
When the Bank buys bonds in the market, it often (not always) creates brand new money.
This money creation happens by the Bank topping up financial institutions’ accounts who hold money with them.
It’s not using taxpayer money to purchase bonds.
The emergency package has worked. Rates (which move inversely to prices) on 30-year bonds, and across the yield curve, have tumbled over the last week.
Yield on UK 30-year gilt has tumbled
The Bank has increased demand in the bond market, pushing up prices and down yields. By committing to do “whatever it takes,” that sends a signal to investors it’s not prepared to allow turbulence to spread through the market, pushing yields further lower.
However, there’s one important thing to note.
Last week’s package was similar to the Bank’s Covid-19 and financial crisis quantitative easing policy.
Throughout that policy’s lifespan, bond yields have been at historic lows, meaning the Bank has made a profit on a lot of the assets it purchases. These profits were funneled back to the Treasury.
Now rates are trending higher, the Bank will book a loss on a large chunk of its balance sheet.
But, this doesn’t mean the taxpayer is on the hook. Having the power to generate new pounds means the Bank has the capacity to absorb these losses.
The big risk is if the Bank is seen to be financing government borrowing by the markets and doesn’t allow higher rates to pass through the economy to tame inflation.
That will deal a sharp blow to investor confidence in the UK.