UK Treasury Faces £11.2 Billion Losses from BoE QE Program

The UK Treasury is facing significant losses from the Bank of England's quantitative easing program. The central bank's losses are projected to reach £11.2 billion in fiscal year 2025-26, primarily due to a negative carry on its gilt holdings. This is because the BoE earns coupons on gilts while paying Bank Rate on reserves created to fund those purchases. Since 2022, this mechanism has turned negative.

The second factor driving losses is bond valuation, as gilts bought when yields were low have fallen in market value. The Office for Budget Responsibility forecasts a £2.4 billion loss for the previous fiscal year. Governor Andrew Bailey notes that the BoE cannot currently follow the approach used by other central banks and hold losses on its balance sheet.

Removing the indemnity agreement would alter how losses are financed, but not eliminate their effect on public finances. The Treasury remains responsible for covering these losses, which could be done through gilt issuance or reserve financing. However, some economists argue that changing the framework as losses mount could raise suspicions of fiscal dominance.