The Ongoing Costs of Quantitative Easing

• In the year to 28th February 2023, the Bank of England Asset Purchase Facility made a loss of £169.1 billion, or about 6.5% of GDP.
• Over its entire life up to 28th February 2023, it had made a cumulative loss of £72.3 billion, or about 2.8% of the GDP of 2023.
• QE was used to sustain economic activity after the financial crisis, after the EU referendum, and during the Covid pandemic.

An updated estimate of the costs of the Bank of England’s quantitative easing programme became available when the annual report of the Bank of England Asset Purchase Facility for the year ended 28^th February 2023 was published earlier this month. The Asset Purchase Facility, which was set up in 2009, is a subsidiary company of the Bank of England in which the gilts bought in the QE programme are held. The gilts are financed by a floating interest rate loan from the Bank of England proper to the APF as sperate vehicle.

The Bank of England is indemnified by the Treasury against any losses made by APF; equally, the Treasury gets the benefit of any profits.  From the beginning of the APF’s life up to 28^th February 2022, the gilts that it had acquired generally appreciated in price and the APF had made a cumulative profit of £96.9 billion.

Gilt prices have fallen very heavily since February 2022, because of rising inflation and short-term interest rates, and because QE has been replaced by its opposite, known as QT – quantitative tightening.  In the year to 28^th February 2023, the APF made a loss of £169.1 billion: over its entire life up to 28^th February 2023, it had made a cumulative loss of £72.3 billion, or about 2.7% of the GDP of 2023.

Since 28^th February 2023, gilt prices have fallen yet further.  Yields have risen by 160 basis points ( = 1.60 percentage points) at the 2 year maturity, 76 bp at 10 years, 50 bp at 20 years and 41 bp at 30 years. The APF Annual Report says that, as at 28^th February 2023, a parallel movement of 1 basis point in the gilt yield curve affected the value of the APF’s gilt assets by £513.1 million (Note 12b to the financial statements). It is clear that the APF has sustained substantial further losses so far in the current financial year.

These are real losses, which taxpayers will have to bear.  The public sector has bought assets at a high price, sold some of them at lower prices, and those that it still holds are now worth less on average than it paid for them.  Moreover, the QE programme in effect drastically shortened the maturity of the government’s debt, by removing from the market large amounts of fixed-interest bonds and replacing them with the greatly-enlarged reserve balances of the commercial banks which financed the Bank of England’s loan to the APF and the acquisition of the gilts. As a result, the government budget is now much more sensitive to fluctuations in short-term interest rates; consequently there is a higher risk that the public finances will become unsustainable and that monetary policy will be constrained by budgetary considerations.

QE was used to sustain economic activity after the financial crisis, after the EU referendum, and during the Covid pandemic. QE programmes like that of the Bank of England were implemented by many central banks, including the Federal Reserve, the European Central Bank and the Bank of Japan. They all seem to be leading to losses on a grand scale. The Federal Reserve had lost about $900 billion on its QE operations by the end of March 2023. The German national audit office, the Bundesrechnungshof, has warned that the Deutsche Bundesbank may need to be recapitalised on account of losses arising from QE (see Chazan and Arnold 2023).

A review of the role of QE in monetary policy in the light of international experience would be very timely. It would have to estimate the benefits that the programmes secured, and take account of the costs to the public finances. It would also need to consider whether other policies could have achieved the same (or better) results at less cost.

Further Readings:

Allen, W., Chadha, J., & Turner, P. (2021). Commentary: Quantitative Tightening: Protecting Monetary Policy From Fiscal Encroachment. National Institute Economic Review, 257, 1-8. doi:10.1017/nie.2021.27

Allen, W.A. (2022), ‘Quantitative easing, government debt management and debt interest’, Box A in National Institute UK Economic Outlook – Autumn 2022.

Breedon, F., P. B. Carbo and J. S. Chadha, (2023) Evidence to Treasury Committee

Chadha, J. S. (2022).  ‘Time to Tackle the UK’s Quantitative Easing Problem‘, Financial Times, August 4 2022.

Chazan, G. and M. Arnold (2023), ‘Bundesbank may need recapitalisation to cover bond-buying losses’, Financial Times, 26^th June.

Fujuki, H. and H. Tomura (2017), ‘Fiscal cost to exit quantitative easing: the case of Japan’, Japan and the World Economy, vol 42, pp 1 – 11.

Levin, A.T., B.L. Lu and W.R. Nelson (2022), ‘Quantifying the costs and benefits of quantitative easing’, NBER Working Paper no 30749.

National Institute of Economic and Social Research, Press Release, “Quantitative Tightening: Protecting Monetary Policy from Fiscal Encroachment – One Year On“, 10 June 2022.

Young, T. (2023), ‘How quantitative tightening *really* works’, Financial Times, 30^th January 2023.