According to the OBR the Bank of England will lose us £288bn from autumn 2022 to the end of their bond portfolio in 2036. The Chancellor has recently approved some wide ranging changes to the way the Bank handles the bonds to try to limit the damage and delay some of these losses. The latest policy set out in the Chancellor’s letter of 17 th September 2026 reminds us that contrary to the general belief that the Bank is independent and decides these matters,the Treasury still has most of the power.
Gordon Brown in 1997-8 made radical changes to the Bank. People remember these for his spin that he was making the Bank “independent” when most of what he did stripped the Bank of crucial powers to control money, markets and banks. The power to issue new government debt in the market was given to a new body, the DMO, in the Treasury. The power to regulate the commercial banks and other financial markets was given to the Financial Services Authority. He removed the powers of oversight of money and bullion markets. He removed the executive power of the Court of the Bank, making it a non executive supervisory body.
In return he gave the Bank the sole power to fix the base rate and to provide independent forecasts of inflation and the economy. Even these powers had an override allowing a Chancellor to intervene in the public interest if necessary. Alastair Darling with other Finance Ministers had to do this to prevent extreme Bank of England tightening bringing down even more banks. The government sets the target the Bank has to hit and can change that,as Gordon Brown himself did when he switched from RPI to CPI, a softer target.
His system unwound with the banking crash, when the regulatory partitions he created impeded prevention and treatment. The Bank and FSA blamed each other for the big failings to regulate the banks. The Coalition government gave the Bank of England some return powers over banking and financial market regulation to correct the Brown mistakes.
The crash itself led the Treasury and Bank to start Quantitative Easing to create looser and cheaper money and credit. The Bank bought up government debt at rising prices to get longer term interest charges down. This allowed the government to borrow more at affordable rates to pump prime the economy. Shadow Chancellor George Osborne argued against, claiming this was money printing which was bound to be inflationary. When he took over as Chancellor he changed his view and himself embarked on more Quantitative Easing. He inherited £200 bn from Chancellor Darling and added a further £175 bn in three tranches. Philip Hammond did one tranche of £70bn. At the time of the covid lockdowns Rishi Sunak approved two tranches for £300bn and added a third tranche of £150 bn when recovery was well underway.
Each time more QE was proposed the Bank needed the Chancellor to sign a letter granting consent, and to sign an agreement that the Treasury(taxpayers) would pay for any losses caused by owning these bonds. Towards the end of 2022 a nasty inflation was embedding. The Bank and Treasury without conceding QE had been inflationary reversed the policy. The Bank started selling the bonds back to the private sector, often at big losses. The Treasury who had pocketed the profits on the way up started paying out larger sums to reimburse the Bank.
Last week the Treasury and Bank at last realised that the scale of the losses under the bond sales scheme was unacceptable. The Chancellor has now authorised the Bank to hold the £120 bn of longer dated bonds with the largest losses at current prices until they eventually mature, avoiding taking big losses on sale. He has also said in principle the Treasury will start buying the bonds the Bank wants to sell rather than pushing them out to private buyers in the market which might disturb prices more. This will however mean the government having to borrow more itself to pay for the bonds it is taking from the Bank, so there will still be negative market pressures from government actions.
I have long argued against the damaging actions of these programmes. Whilst I supported the first two tranches of covid QE when the government locked down most of the economy, as we needed a strong offset, I thought the third tranche was too much and likely to prove inflationary. I tried to get the government to borrow more of the money it needed during the QE phase for longer time periods, as the debt that was clearly an artificial bargain. They insisted on continuing to borrow a lot for shorter dates. We lost the opportunity to have cheap debt for longer.
I have argued against the bond sales in the markets under QT. I urged them to do what the Fed and European Central Bank are doing, winding down their bond portfolios as the bonds reach repayment but not before. Instead the UK has sold large quantities at large losses which the taxpayer has to pay. Private investors have benefitted twice from the programme. They sold out to the Bank at very high prices and can now buy back at much cheaper prices. The Bank has invaded fiscal policy as it demands the money for its losses.
This is a sorry tale. We await the recalculation to see how much of the planned £288 bn big loss they can avoid by the latest policy. The Chancellor’s letter makes clear this is not the sole preserve of an independent Bank but a joint policy that has gone wrong where the Treasury and taxpayers pick up the bill and are ultimately responsible. When I tried to get previous Chancellors to stop the sales and curb the losses I was told the Bank is independent. Yet it was their signatures on the letters that underpin the whole policy and mean they had every right to intervene, as the latest Chancellor has now done. He needs to do more to curb more of the losses that are still being needlessly incurred.
Pity the poor taxpayer. Gordon Brown is the main cause of this by badly changing the regulatory system to allow the big boom and banking bust. This led directly to Darling’s Treasury inventing QE and setting up the taxpayer for losses. The covid episode compounded the problem based on more wrong thinking by the Bank and Treasury. Since 2022 there has been needless harm visited on taxpayers by taking big losses on selling bonds bought at silly prices during peak QE. Other Central Banks avoided extreme losses because they had no Treasury guarantee to fall back on. It is worrying that so many Chancellors signed this all off without asking how much taxpayers might lose.