Bank of England bond sales don’t cost taxpayers anything

It’s the original purchases that are costing the taxpayer money:

The Bank of England’s controversial decision to sell off UK debt has cost taxpayers £36bn in just four years, according to new figures.

That’s not true.

While central banks around the world are pursuing a similar policy, most simply let bonds mature and then do not reinvest the money.

The Bank is the only major central bank to actively sell bonds before they mature, immediately crystallising billions of pounds of losses for the taxpayer.

That is true. But the loss is the same either way. For the loss was baked in when the Bank of England bought all those bonds back when. Buying gilts with 1/2% and the like coupons just was/is going to lead to a loss. A loss that can be taken in one of two ways but a loss which is going to be taken in one of those two ways.

The bank invented money to buy those low coupon gilts. That invented money is now rolling around the central bank reserves of the banks. The BoE currently pays 3.75% on those reserves. The BoE collects the 1/2% coupon on the glits. That’s a 3.25% (in this example, other rates are also available on such gilts) annual loss on the amount outstanding. Over a decade or three that’s a substantial loss, obviously. If base rates are 3.75% then the capital value of the 1/2% gilt is obviously substantially less than par. If the BoE sells such a gilt at the market price it crystallises that substantial loss.

But selling the gilt doesn’t create the loss. The loss is baked into the interest rate differential, the choice is to take that loss over time or in the one fell swoop. The loss was caused by buying the 1/2% gilt, not by the selling of it.

Holding until maturity and not rolling it over or selling it now makes no difference to the size of the loss. For the current capital value is determined - determined - by the interest rate differential. It does make a difference to the timing of the recognition of the loss, that’s true, but that’s all that is true about it.

The loss comes from having done Quantitative Easing, not from the clean up that is Quantitative Tightening.

Sorry, there is no free money.

Tim Worstall