Bailey Warns Inflation Risks Remain 'On the Upside' Amid Quantitative Tightening Concerns

Bank of England Governor Andrew Bailey has warned that inflation risks remain 'on the upside' due to energy prices and uncertainty over their impact on wider inflation. He defended the bank's reliance on the Treasury to cover losses generated by quantitative tightening, stating that the current system is economically neutral but 'quite painful' in political terms.

Bailey pointed out that the Bank of England pays around £100m a year in dividends to the Treasury, while also needing money back from the government to offset quantitative tightening losses. This arrangement differs from other central banks such as the Federal Reserve and European Central Bank, which can offset seigniorage against quantitative easing and tightening costs internally.

Members of the Treasury Select Committee questioned Bailey on the scale of losses being incurred by the bank as it unwinds its bond-buying programme, with Sir Dave Ramsden estimating that the overall impact on term premium is between 20 and 30 basis points, compared to a broader 350 basis points rise in yields over the period.

Bailey also addressed concerns about the Bank Charter Act of 1844, which allows for the transfer of profits from note issue to the Treasury. He argued that this system offers greater transparency than approaches used elsewhere and would make no difference in economic terms if changed.