The UK government is facing rising costs as it covers losses from the Bank of England’s quantitative easing (QE) program, now in its unwinding phase known as quantitative tightening (QT). Since 2009, the Bank of England purchased government and corporate bonds through the Asset Purchase Facility (APF), a legally separate entity backed by HM Treasury. Initially, the APF generated profits, totaling £124 billion by the third quarter of 2022, which were transferred to HM Treasury. However, as the APF reduces its holdings, it has begun incurring losses, with HM Treasury expected to cover £19 billion in losses by 2026-27.
Recent economic changes, including higher Bank Rate expectations and increased government debt yields, have worsened the APF’s projected losses over the next five years. The Bank of England adjusted its QT program last month, slowing bond sales and focusing on bonds maturing between 2035 and 2049. These changes have increased total APF losses by around £5 billion for 2026-27 and 2027-28, though losses are expected to decrease to £13 billion by 2030-31.
Only a portion of these losses directly impacts the government’s fiscal aggregates. The changes since March are estimated to reduce the current budget surplus by £3.4 billion, while leaving the government’s preferred debt measure (PSNFL) largely unchanged. The losses result in cash transfers from HM Treasury to the APF, which can be funded through higher borrowing, increased taxes, or reduced spending. The Institute for Fiscal Studies suggests exploring alternative arrangements to manage these costs, as current policies may not offer a free solution but could reallocate losses over time or among different economic groups.