Bank of England's £164bn Losses: A Lesson from Australia on Quantitative Easing

The Bank of England has accumulated billions of pounds in losses due to its quantitative easing (QE) program. This program was implemented during crises such as the Covid-19 pandemic and Brexit, where the bank bought government bonds to support the economy.

However, the Bank's approach was inefficient, leading to losses that are significantly larger than those experienced by other central banks. According to a recent estimate, the cumulative net lifetime loss of the Asset Purchase Facility (APF) is around £164bn.

One reason for these losses is the Bank's decision to buy long-dated bonds, which have been particularly volatile and resulted in significant losses. In contrast, other central banks, such as the Federal Reserve, have taken a more selective approach to QE, focusing on shorter-dated securities that are less sensitive to interest rate changes.

The Bank is now facing another challenge with its quantitative tightening (QT) program, which involves actively selling bonds. This has led to higher borrowing costs for the government, adding around £25bn-£40bn to lifetime borrowing costs.

Australia provides a model for more efficient QE and QT programs. The Reserve Bank of Australia restricted QE to shorter-dated securities, while the Federal Reserve shifted purchases towards specific market dislocations. By adopting a similar approach, the Bank of England could minimize losses and optimize its balance sheet management.