I would like the meeting between the Governor and Richard Tice to change things for our country. They are to meet with the Governor defending his current policy of large losses on the bond portfolio, and Richard Tice suggesting there could be cuts of £35 bn in the annual costs. There needs to be compromise, not a stand off. I set out in this brief a way through for both men.
The OBR says the Bank will lose £257 bn from the end of profits in the second half of 2022 to the final disposal from the declining bond portfolio.All of these losses will be refunded by Treasury payments to the Bank, with taxpayers paying the bill.I have long argued these are excessive, in part avoidable, an invasion of fiscal policy and unacceptable to taxpayers.
These losses are of 3 kinds.
1. Losses on sales of bonds particularly long dated at current depressed prices. These are avoidable.
2. Smaller losses on bonds held to repayment, where the bond was bought at a price higher than redemption value. These are unavoidable.
3 A running loss on holding the bonds, as the Bank says the bonds are financed by commercial bank deposits placed with it. These now attract a higher rate of interest than the interest return on the bonds overall. These losses could be abated.
1.No other Central Bank sells bonds at big losses. The ECB and Fed with similar problems to the Bank of England are running down their bond portfolios as the bonds mature, not by forced sales of them. Getting into line with the others would save the Bank and UK taxpayers who pay the losses billions in losses in the next few years, as the up front capital losses are much bigger than the annual holding losses.
The Governor may argue that over the long haul the losses will be similar. This is only true if the base rate stays up at current levels or goes higher. Assuming the Bank now gets inflation down to 2% base rates should go considerably lower, greatly reducing future running losses on bonds.
The Governor may argue as the UK has on average longer dated bonds it will take longer to end the portfolio by waiting for repayment. Having more longer dated debt is good news as much of it was taken out at lower interest rates and it reduces the refinancing burden on markets, There is no need to panic out of long debt now it has halved or fallen more in value. Just stop the sales.
3. The ECB has moved to reduce its running losses on bonds by offering a lower deposit rate than its base rate. Markets accepted this normal banking practice. The Bank of England lends and borrows at the same rate in most cases, preventing it covering its costs on these activities. Why not introduce a spread between borrowing and lending?
It is also possible to say commercial banks need to keep a minimum reserve with the Central Bank for credit and money policy purposes. This could be at zero interest.Indeed, prior to 2006 the Bank demanded special deposits to regulate commercial bank lending and offered no interest on them.
However, it could be a step too far to abolish all deposit interest on the current high level of bank reserves placed at the Bank of England. That would greatly impair bank income and cashflow, leading to less credit to finance growth. Switching all commercial deposits to zero interest would amount to imposing a major bank tax. Markets might worry that such a shock could hit an already weak economy badly.
Does all this undermine Bank independence?
The Bank and even the Treasury may say this undermines the independence of the Bank. If so they misunderstand current Bank powers and status. The Bank has an independent duty to hit the 2% inflation target and maintain the solvency and stability of the financial system. It has the independent power to forecast inflation and fix the Base rate. Nothing in these proposals affects that.
When the Bank under Darling as Chancellor first started creating money and buying bonds they sought permission to do so from the Chancellor, and did so for all subsequent tranches of bond buying. More importantly each time they sought and obtained a government indemnity to pay all losses whilst agreeing to pay the government any profits. They clearly act as agents of the Treasury when it comes to the bond portfolio. The government has every right to influence the way their portfolio is managed by the Bank.
So the Governor needs to compromise on bond sales and rates of interest on commercial bank deposits, and Richard Tice needs to compromise on how much money he can take off the banks given their role in financing growth.
Summary of proposals
Stop all sales on bonds held by the Bank with more than 3 years to maturity
Introduce a deposit rate a little below base rate and a lending rate a little above to give the Bank of England a spread or margin in dealings with banks
Make a monetary and economic judgement of whether to introduce minimum reserves to be deposited in the Bank by commercial banks at zero interest and if so how much is feasible, given current modest levels of money and credit growth.
September 12, 2025
Someone must be making a fortune from these bond purchases. Who exactly
If it’s the retail banks then a windfall tax should be applied.
More to the point, why does the bank consistently miss its inflation target when other countries such as Japan and Switzerland manage too
The other puzzling thing is why the BoE has oversight on net stupid.
September 12, 2025
Well any windfall tax on the banks will mainly damage their customers and the economy.
About 20 years back I could place deposits with the bank when cash rick and get about base rate in interest and borrow from them when cash poor at about at about base plus 2% now they pay about base minus 2% and lend at base +4% up to 40% on some accounts! A vast increase in their margins how is this justified it is a sign of a lack of real and fair competition!
JR makes a v. good points but Bailey (Sunak’s choice) is unlikely to do anything remotely sensible. Not his style! He is dire as was/is Carney – Osborne’s dire and expensive choice! Expensive in wages and far more expensive in their many serial errors.
September 12, 2025
Why is the Governor of the Bank of England having a meeting with Tice?
I thought he sat in his ivory tower and only spoke to politicians when forced to by the government of the day.
September 12, 2025
I would account it differently. The BoE made purchases at a substantial premium to par values during QE, using printed money as part of ZIRP. The sellers got the cash which supposedly they were to invest in expanding the economy. However, in reality it simply went to shoring up bank balance sheets following sustained losses in the Financial Crisis. Savers and investors were crucified by ZIRP which saw sharply lower asset yields and allowed a range of malinvestments dictated by governments, including renewables and HS2 and support for indigent migrants.
QE was an emergency response to failed financial regulation that led to collapsing asset values following the property bubble it had encouraged and threatened to destroy the financial sector. QT is perhaps an attempt to rein in government spending by taking cash out of the economy directly, and through sales of additional gilts to fund the crystallised losses, leading to a need for more tax revenue and less spending. It also forces interest rates up because of extra gilts supply, damaging the economy, although the higher rates do support the exchange rate and attract some overseas buying of gilts.
The government is proceeding with its malinvestments and reckless spending regardless, risking a loss of market confidence and a major crisis.
September 12, 2025
These are all excellent suggestions Sir John. Collectively they would save the British taxpayer multiple GBP billions especially by stopping the front-loading of losses on the majority of Gilts.
I trust the Governor of the BoE will be open to these suggestions and to making the QT process more efficient. As constructed it is not an efficient process and I’m sure he can see that too.
September 12, 2025
Here’s a question for Sir J.
If these ‘losses’ at the BoE are so terrible for the UK economy, would he not expect that the supply of money in the economy to have been reduced by such losses?
Reply The losses are losses for government and taxpayers. They are neutral for the Bank of England who get them reimbursed. They allow the private sector who sold the bonds to the Bank at high prices to buy them back at much lower prices. Selling the bonds and raising interest rates does slow money growth. Money the private sector could spend on goods and services is used to lend to the government.
September 12, 2025
Thank you for your reply.
A few clarifications here:
Is there any difference between government money and tax payer money?
Is there any difference between government money and BoE money?
Where does the government spend the money that it borrows from the private sector?
As a result of this Gilt selling activity, is there any less money available in the economy for the private sector to spend?
Reply There is just money. Government needs to get enough of it by taxing and borrowing to meet its spending needs, just as individuals need to earn or borrow to spend. The state owns the Bank of England so it presents accounts both including and excluding the Bank of England, as the bond transactions have a big impact on the overall figures. The government borrowing is used to help pay for all kinds of spending it incurs. It all goes into the same pot as tax revenue. Yes, as they sell gilts so the private sector has less money to spend as it is saving via buying government debt.
September 12, 2025
Thank you.
Do you see you own circular money flow argument in your last answer.
September 12, 2025
reply to reply…yes they borrow for all sorts of things which generally do no good to the British economy.
We buy and sometimes part manufacture various type of arms. We never seem to get out of the position of giving these VERY expensive items away for use in foreign wars…..rarely of direct interest to us.
We give away assets like islands that have a military use, then decide we should pay large sums to rent back for 99 years.
We provide comfortable ferries for on average per month over the last 2 years for approx 4000 illegals setting off from France. We also allow a legal application to come here, as well others who are entitled, for approx 1.2 million per year. Most cost the taxpayer enormous sums for years, with virtually no payback.
We pay large sums directly and indirectly to universities and colleges for further education, including for the above immigrants.
We buy interconnector electricity mainly from France averaging at 20% of our demand. We buy oil, gas, and wood chips from abroad to be used in industries and domestic housing.
This is all borrowed, so the debt interest grows annually.
September 12, 2025
@Reply – my old ‘hobby horse’ whose money is the BoE getting, then who is responsible and accountable for it arriving with them. In some ways I am of course referring what should happen, then the reality has been warped. But, in reality the question is why isn’t it happening, why is spend not managed, why is the so-called management direction of 2% inflation not happening. Then why are the managers not responding?
More Questions than answers, we know who is empowered to do the job – then everything falls flat. Even the scrutineers (the HoC) don’t care.
Reply The Bank creates the money for the QE. it gets taxpayer funds to cover the losses.
September 12, 2025
While all the technical details are being batted back and fore I am sure your inputs will be considered. When that has all been got through perhaps Richard T can ask why the BoE governor finds it necessary to be a member of the Fabian Society? The role of Governor of the BoE should be apolitical?
September 12, 2025
RE :
According to Wikipedia, Mr. Bailey, when at Cambridge (History) chaired the university’s branch of the Fabian Society. Mr. Starmer, before he became an MP, served on the executive committee of the Fabian Society, a far left movement, whose logo is a wolf in sheep’s clothing. I think this answers all the questions.
September 12, 2025
I note that Bailey was appointed in 2020 for an 8 year term. His time will be up in 2028, potentially still during the present government. The appointment of a successor becomes politically important when governors start trying to run the country through bank policy, as Amstel Rothschild reminded us (and Liz Truss found out) “Give me control of a nation’s money and I care not who makes its laws.”
The next government will need to be happy with the appointment, and if they are not (Labour could easily attempt a wrecking appointment), they need to have a credible replacement lined up and ready to go, as well as raising their objections when the next appointment or extension of Bailey’s term occurs.
September 13, 2025
Would not an AI powered algo work better at inflation targeting than the Board. Likely a lot cheaper with more predictability and better objectivity. Any overide decisions would then need to be explained and signed off on by Chancellor OR Board who are incentivised to meet the inflation target.
September 12, 2025
John, currently reading Boris Johnsons book “unleashed” an interesting read.
You are mentioned in it, with regards to the financial crash of 2008.
The then Queen asked at the time “why did nobody see this coming”.
Boris outlines that actually you did !
He also outlines the many e mails, ideas and discussions he had with you about sensible growth strategy and cost cutting (after Covid) which he then put to the then Chancellor at the time, sadly without much success.
Perhaps if he had made you Chancellor instead of Sunak, things in the Uk may have been very, very different now.
Reply Thanks for mentioning that. This blog still provides continuous advice on how to make the UK more prosperous daily and is a resource for any government. The number of viewings of this site has taken off over the last month and is currently running at over 200,000 a day.I am always willing to discuss it with those taking important decisions if they would find that helpful. Boris was always interested in my views.
September 12, 2025
I cannot stand by idly and see history rewritten! The record shows that in an effort to save Johnson’s ailing premiership (after he ceased to be the people’s Blue Boris, a change heavily influenced I now think by his bout of Covid) I wrote to him recommending he read this diary every day in order to learn what he should be thinking and doing. Had my advice been heeded, it is not fanciful to suppose that Johnson would be prime minister today instead of the wretched article we have.
September 12, 2025
But 100,000 of those views are Lifelogic to post once more
September 12, 2025
There were actually quite a few people who saw what was coming. I recall participating in Willem Buiter’s blog at the FT (he had been on the MPC so the BoE should have also been warned), and the forum run by “Dr Doom” a.k.a. Nouriel Roubini from about 2003. I had been alarmed by seeing formerly blue chip US financial institutions indulging in mortgage and other lending aimed at high risk clients, and the signs of people in the UK using their homes as ATMs to buy expensive cars or indulge in pyramid BTL purchases. The use of MBS securities and other derivatives to offload risk became a time bomb. I know Sir John was part of those debates and kept himself well informed.
September 12, 2025
Boris’s huge errors were falling for Net Zero – perhaps due to taking advice from his new “Theatre Studies” wife and pissing away £400 billion+ of borrowed money on Covid “Vaccines” and lockdowns both of which did vast net harm! As should have been know at the time and certainly should have been monitored and them would have been know very quickly after rollout!
Also having Javid and Sunak at Chancellors! Also why did he quit when Gove stabbed him. He would still have beaten the dire Theresa May?
September 12, 2025
Let’s hope Richard Tice keeps minutes of the meeting and then we will see just how incompetent the governor is.
Reply No, let us hope the Governor does the right thing so the UK can be better run. I think the Bank may slow its bond sales this month.
September 12, 2025
Richard Tice is an economic illiterate. Whatever he says on economic matters is directed by the dreadful Nigel Farage, who is equally economically illiterate
Reform’s views on net zero and particularly their incessant blaming of the high costs of energy here on renewables are demonstrably false, as you are well aware
If you moderate posts detailing the actual facts – because they differ from your views or the party line – then posters are all getting a biased opinion, without being given the opportunity to put the other side of the debate.
Reply I often post your views whilst disagreeing with them as you well know. Today you are quite wrong to say renewables are cheap energy.We need to supply full back up for when they do not work which is very expensive, and the guaranteed prices for some renewable electricity are very high.
September 12, 2025
I wonder how many eco loons and economic illiterates are in the City trading community?
September 12, 2025
Stred
City trading will hook onto anything that will either make or lose money, they try to anticipate which way it will go in advance, so that they make money for themselves, sometimes it is alleged they may even try to influence the market a little, Up or down it matters not, as long as they make money by anticipating the movement correctly.
September 12, 2025
@Sakara Gold – ?, logic dictates if there was even an element of so-called truth in the statement you made, the last thing any renewable energy operation needed was the taxpayer keeping them alive. They would stand on their own and compete with all the alternatives. The UK having energy at 4 times the price of some of our competitor nations is for the most part down to it being loaded with the costs of renewables.
September 12, 2025
Google “Kathryn Porter”. A real scientist. Her recent article for the Telegraph blows your views out of the water. She was also interviewed by Alison Pearson and Liam Halligan for this weeks “Planet Normal” Telegraph podcast. Worth a listen, particularly around Miliband’s views on costs of Net Zero!!
September 12, 2025
SG : The wholesale price for electricity is around £70-£80/MWhr (based on the price of gas we are told and which includes a carbon tax). The current weighted average fixed offshore wind CfD price is £149/MWhr. The lowest operating CfD is Hornsea 2 at a CfD of £80/MWhr. Hornsea 2 lost £150m before tax in 2024 more than the loss of £107.5m in 2023. The CfD price for fixed offshore wind for the next auction is £113/MWhr. Professor Gordon Hughes of the Renewable Energy Foundation says that renewables subsidies have cost £220bn (2024 prices) since 2002 and are currently running at £26bn/year and now comprise 40% of the cost of the UK’s electricity supply. NESO has costed the government’s Clean Power 2030 project at “over £40bn annually”. The CEO of GBE has said we will need to use floating offshore wind as we are running out of shallow water. The CfD for floating offshore wind is £271/MWhr. This is all without taking into account the costs of grid upgrades and requiring to run parallel gas generation for backup and grid inertia. These are the facts which explain why our electricity prices are so high.
Reply Yes quite right. I am trying to counter the NZ myth that our electricity price is high thanks to the gas price
September 12, 2025
@Sir John
The fact that you post so many of my writings is appreciated
Paying CCGT operators for stand-by services is known here as the Capacity Market. The Capacity Market is a mechanism introduced by the last UK Government to ensure that electricity supply continues to meet demand as more volatile and unpredictable renewable generation plants come on stream. The CM is organised by actions, potential Capacity Market participants bid for contracts one year ahead of the delivery date. In other words, this represents the payments to CCGT operators to keep their plants on standby during times when renewables intermittency is at a peak.
The UK’s T-1 Capacity Market auction for delivery year 2024/25 concluded after eight rounds of bidding with a clearing price of £35.79/kW/year. This price represents a 40% decrease compared to the clearing price of the T-1 auction for delivery year 2023/24 which cleared at £60/kW/year
The total cost of UK electricity produced in 2023 from all sources was just under £172bn. For the 2023/24 delivery year, total Capacity Market payments were £1.3bn. This represents a trivial 0.75% of our total electricity production. The average energy costs for a typical 3 bed house in 2024 was £1,672.05 – so just £12.54p of this is the Capacity Market costs.
The fossil fuel lobby likes to provide wildly exaggerated figures for these sort of mechanisms, which divert attention from the $trillions in subsidies that they get from global taxpayers each year
Reply Fossil fuel producers pay extremely high taxes – UK 78%- to help pay for the direct subsidies and high guaranteed prices paid to renewable generators.
September 12, 2025
SG :
The anti-fossil fuel activists have a very strange idea of what constitutes a subsidy. To quote part of an article in the Guardian dated 09/09/2025 about this subject:
“Among the biggest subsidies the US offers oil companies, the report found, is a federal tax rule allowing corporations to credit taxes and royalties they pay to foreign governments on overseas income against their domestic tax bills, to avoid being taxed twice.”
September 12, 2025
Currently we pay on average well over £150/MWh for renewables by the time we add in the direct subsidies they get from ROCs, CFDs, FiTs and REGOs. Even with the hike in UKA carbon prices (which are in effect a protectionist tariff to hike the returns for renewables on ROC subsidies, increasing bills for everyone as a government imposed energy tax), gas generation costs less than half that. And that is before we add in the other costs of renewables for extra grid connections and stabilisation facilities such as grid batteries, and the extra costs for grid balancing and curtailment payments.
Future costs will increase sharply because there will be much more curtailment, much more need for extra grid facilities and costly storage and no reduction in wind farm costs. Indeed, as we move to floating wind further offshore the cost could escalate alarmingly.
It is high time this experiment was terminated, and we got back to trying to build an energy system that offers low cost reliable supply with competitive diversity of sources instead of becoming China dependent.
September 12, 2025
Net zero, renewables (plus costs of back up) and Ed’s rigged energy market are the reasons we pay 3-4 times as much for energy in the UK as in the USA. So is Miliband so thick he does not know this or does he have so other motive and is lying? There is no doubt over this what so ever!
September 12, 2025
Let us then raise a cheer for Mr Tice and hope he enjoys more success with the Bank than was achieved by any of Osborne, Hammond, Javid, Sunak, Zahawi, Kwarteng and Hunt or has been achieved by Reeves.
I think it very proper of the Governor to meet Mr Tice for its shows the Bank is aware of its duty to explain itself and to engage with all sections of society. I am surprised and disappointed that the Governor has not asked to meet you Sir John.
September 12, 2025
I note that Mervyn King as a former governors has once again felt motivated to make public comment about BoE policy. I don’t think he has been invited to a lunch or meeting at the Bank either. However, he has the advantage of being able to speak in the Lords and its Select Committee.
September 12, 2025
This will be a very interesting conversation between two very different people. It is very good to know that Tice is taking the trouble. I would back him against the Governor.
September 12, 2025
Perhaps the Bank should hire the ECB as consultants. Surely there is some better talent in the UK. Why does the Bank get it so wrong so often and for so long? Is it the people in charge? If so how can they be replaced without merely recruiting the same sort of people?
Reply No need to spend any money on consultants. I have told them what to do and it would be easy to do. My advice is free.
September 12, 2025
Free and consistenty correct JR for 35+ years!
September 12, 2025
On 3 retail banks pay their customers a pittance of a return on their easy access short term deposits.
No reason why the Bank of England should not do the same to the retail banks.
September 12, 2025
On 1 do the bonds that are sold at a loss get replaced with current bonds or does that money disappear from the economy?
If the money disappears from the economy then a case could be made from a cashflow perspective that the billions would be paid out over time anyway. Otherwise what is the point of the policy?
Reply The bond remains as a government debt and a holder’s asset. It just has a different owner. The money raised by the bond was spent shortly after being borrowed. The government is constantly issuing new bonds to raise more money to spend. That money lent by the private sector cannot then be spent by the private sector but will be spent by the government.
September 12, 2025
The government is raiding the capital markets significantly beyond what they should be doing. In essence we have both a taxing problem and a spending problem. The taxes are far too high. Government spending is far too high. It’s “production” that matters. The way to increase production is for the government to largely get out of the way and allow the private sector to operate with greater freedom.
September 12, 2025
Spent by the government – largely wasted and much spend doing net harm – Covid “vaccines”, Net Zero, the war on employers, non doms, motorists, private schools, pushing heat pumps and EV cars, the mad energy policy.
It is now clear the mRNA vaccines seem almost certainly to have increase deaths significantly, heart conditions, loss of live births, cancers… they even seems to have actually increased you chances of catching Covid!
September 12, 2025
Thank you for the reply but I was referring to the coupon
September 12, 2025
When the Bank sells a bond under QT from its QE portfolio the loss against the original purchase cost is immediately billed to the Treasury under the terms of the guarantee. The Treasury has to fund the loss either by raising more tax or cutting spending, or (more likely) simply adding to the debt by increasing the volume of sales of new gilts (perhaps via initial more temporary borrowing that is refinanced).
Coupon payments normally go to the owner of a gilt (and will go to the new owner post sale). However, the arrangement for the BEAPFF is that coupon income is offset by the interest charged on the loan from the BoE itself that finances the portfolio, and any net profit is paid to the Treasury. If there is a loss because the coupon income doesn’t cover the cost of the loan that too is billed to the Treasury along with crystallised capital losses on sales.
During ZIRP there was a significant surplus of coupon income over loan cost. A better treatment might have been to hold it as a reserve against capital losses on redemption or sale. Most (but not all) QE purchases were at a positive if small redemption yield, so there needn’t have been any recorded loss on these if the bonds were held to redemption. Of course doing that would have led to the need for more funding by borrowing or cutting the budget deficit. IIRC it was Osborne who wanted cash in hand to reduce the recorded deficit while storing the problem for his successors.
It’s worth noting that a significant element of new gilts borrowing is refinancing of gilts that are being redeemed when they fall due. We face rising interest bills because refinancing is mostly at much higher rates than the bonds that are redeemed.
September 12, 2025
Why doesn’t the government raise more money via NS&I? They could increase the limit on Premium Bonds, which would pull in more investment from the public at home and abroad. The 50K limit hasn’t been raised in years.
September 12, 2025
Nothing will change all the time Government and Parliament refuse to Manage. Yes, that is repeating a tired old complaint, but it is the only one that fits the bill for today’s woes.
We have a parliament, a government in place to look after our interests. They have the privileged of being able to take money from us to succeed in this task. How it is spent is their responsibility and the bit they are held accountable for.
The chain of events is that the Bank of England wants to throw £257bn(another ‘black-hole’?) of our money away. That money arrives at the Bank via the Treasury after being sanctioned by the Chancellor, then the Cabinet and ultimatly approved by Parliament. Yet, the Government in handing over our money and is not getting the 2% inflation it says needs for the economy, it is the management, the Board of UK.plc that is not getting its instructions carried out. As they are the ones also capable of firing and hiring the Governor of the BoE. It poses many questions who is in charge? and how independent should a system be seen as when it relies on the funding and subsidies for the already punished Taxpayer?
Its all smoke & mirrors riddled with deception, where those in charge are even shrugging their shoulders ‘I don’t care’ , fingers crossed behind ones back, ‘not me gov’ or just completely incompetent. To many people free-loading, to many people not taking the job seriously.
September 12, 2025
All sound and sensible ideas, so it is strange that the Governor of the BOE does not adopt them. But to the current Labour Government, you may as well be speaking in a foreign language.
Why are Labour MPs, and the left generally, so lacking in common sense? Why are they so sour and full of hatred towards the UK?
The two candidates for the Deputy leadership are a classic example of the wrong kind of people, both incompetent and more interested in destroying what works than sustaining it. Why is no man in the running? Surely it should be the best-qualified person for the job, not decided based on gender.
Then the Mandelson saga, what a shambles! The PM shows he is weak and indecisive every day!
September 12, 2025
The flaw in the structure is not so much, the guy now at the head having a laugh, as he is unaffected, at everyone else’s expense, but however dreamt up the format and defined purpose. They don’t once seem to have thought every scenario through. Then , from that you get everyone that followed into them into power having a lack of comprehension and ability to understand the duty and responsibility they each had inherited.
That is not to mean at the outset you know what tomorrow will bring, but you do know it will be unpredictable, so what mechanism is in place to change things? Most of us in the real World would hope that those that do the hiring and the firing, and throw our money at this bank also know when it smells all wrong, and when things need to change.
For Labour the millstone around their neck is they were the ones that our 100% vanity and personal ego nationalised the bank in the first place. The usual personal ego upsetting things, we must manage everything even though we have no experience or ability to manage anything. Now it seems that may be admitting they (Labour) are the failures, so come up with some half cockamamie that wasn’t independence and wasn’t privatisation. So isn’t anything to anything other a massive expense for the taxpayer.
The BoE should be 100% private, or public even, or 100% back under the Treasury. But the farce, the ego elsewhere has to stop.
September 12, 2025
The latest quarterly report tor the BEAPFF is here
https://www.bankofengland.co.uk/asset-purchase-facility/2025/2025-q2
It contains some purported illustrative scenarios for various assumptions about future portfolio runoff programmes and interest rates in a rather stylised fashion. I note that there is now a bit more transparency again about the actual holdings and transactions of the fund with spreadsheets of data available here which I may try to analyse
https://www.bankofengland.co.uk/markets/bank-of-england-market-operations-guide/results-and-usage-data
The most recent annual report reveals that the interest on the loan to the BEAPFF now substantially exceeds the portfolio coupon income, so retaining the portfolio runs up losses to be funded by the Treasury. The loan at Bank Rate covers the historic cost of purchases and is paid down by redemption proceeds and proceeds of sale, with the difference with mark to market valuation of the portfolio nominally covered by the Treasury guarantee. The report also reveals that the maturity profile of holdings includes a substantial £93bn in redemptions during the year from 28th February 2025 so sales required to meet their £100bn reduction target are relatively small this year. Previously the Bank sought to use redemption proceeds to maintain the stock of gilts by making fresh purchases – something the government could rely on to ensure a tranche of demand for new issues that helped keep interest rates and gilt yields down.
Selling off gilts depresses gilts prices and increases the government’s borrowing costs on new issues, offsetting the saving in losses between coupon income and loan cost. The loan cost under ZIRP was a money trap: the BoE were happy to charge minimal rates to make QE superficially attractive. Since they printed the money it is unclear whether they really need a Bank Rate return on the loan. They were happy to see the BEAPFF invest at low redemption yields, so really they should have been happy to lend at the portfolio average redemption yield, which would eliminate the current losses on interest versus coupon income. I think Mr Tice has a point at least to that extent.
https://www.bankofengland.co.uk/-/media/boe/files/asset-purchase-facility/2025/apf-annual-report-2025.pdf
Reply There would be a big monetary shock from withdrawing all the interest paid on reserves which would damage a slow growth economy significantly.
September 13, 2025
I was not advocating that, but simply cutting the interest paid by the BEAPFF to the BoE. That would mean the loss between coupon income and loan interest would disappear, lowering the immediate exposure to the Treasury guarantee. Of course, the Bank secured Reserves as funding for the loan because QE money really stayed in the banking system rather than being spent on economy expanding investment and was redeposited as Reserves. That would leave the Bank with a loss on the difference between the interest paid on the BEAPFF loan and the interest they pay on Reserves which would fall outside the Treasury guarantee and thus be subject to negotiation on how it’s covered. I note that probably an essential motivation of the Bank in running down QE is to run down Reserves pari passu to levels more consistent with the need for transactions and prudential risk cover – or even beyond, using Repo markets to provide top-ups. I suspect it is still a risky strategy given the fragility of the real value of so much Bank collateral. Here’s Bailey spouting on the idea last year.
https://www.bankofengland.co.uk/speech/2024/may/andrew-bailey-lecture-london-school-of-economics-charles-goodhart