Bank of England's £120bn Bill Sparks Concerns Over Power Without Accountability

The Bank of England's £120bn bill has raised concerns about power without accountability. When Labour made the Bank independent in 1997, it was intended for monetary policy to be set at Threadneedle Street while fiscal policy remained in Whitehall. However, in August, the Bank quietly announced that its key policy could cost the Treasury £120bn through quantitative tightening (QT). This has led to a rethink of the policy and the practice of the Treasury indemnifying the Bank for losses.

Last year, ministers paid the Bank £17bn to cover these arguably notional losses, an amount larger than the budget of the Ministry of Justice. The financial crisis, Covid, war, and fractious trade disputes have ended the world where monetary policy decisions had predictable and indirect fiscal effects. The Bank bought government bonds to support the economy via its quantitative easing (QE) programme.

The constitutional settlement has not caught up with these changes. Former Bank deputy governor Charlie Bean acknowledges that independence cannot justify giving power to an unelected monetary policy committee (MPC) over decisions with great consequences for public spending. The Treasury stands behind the losses, and gains, made by the bonds bought during QE and held in a Bank of England subsidiary, called the Asset Purchase Facility.

The losses are being produced in three ways: the Bank is selling these gilts at current market prices; the APF generates a loss because the £500bn bonds on its balance sheet generate less income than the repayments, charged at the base rate, on the loan it took to buy them; and gilts bought above their value are booked as a loss when they mature.