The Bank of England, like other Central Banks, is a weird entity, in that it can, if it wants create money. We saw that through the QE programmes, through which it acquired large portfolios of Government Bonds – known as guilts.
The program ran from 2009 to 2022 and was designed to improve financing conditions for companies hit by the 2008 financial crisis. It saw the BOE accrue £895 billion worth of bond holdings while interest rates were historically low.
However, the pace at which the central bank has had to tighten monetary policy in a bid to tame inflation means the costs have risen more sharply than anticipated. Higher rates have driven down the value of the purchased government bonds — known as gilts — just as the BOE began selling them at a loss because bond yields have changed significantly, rising fast as prices fall (as yields and prices work in opposite directions).
The central bank began unwinding that position late last year, initially through halting reinvestments of maturing assets and then by actively selling the bonds at a projected pace of £80 billion per year from October 2022.
Both the Treasury and the BOE knew when the APF was implemented that its early profits (£123.8 billion as of September last year) would become losses as interest rates rose.
Now according to Deutsche Bank, the Bank of England’s losses on bonds bought to shore up the U.K. economy after the financial crisis will be “materially higher than projected until the middle of the decade,”
So should we worry? Well, the Bank of England has a pretty special arrangement with the UK government. Since 2009 it has promised the central bank that it would make good any losses it might suffer from QE, especially after it started sweeping any QE profits back to the Treasury in 2012.
