Bank of England urged to slow bond-selling
· business
The Bond-Selling Fiasco: A Costly Experiment in Monetary Policy
The Bank of England’s quantitative tightening (QT) program has turned into a costly experiment that is bleeding the UK exchequer dry. Economists are urging the chancellor to intervene and put the brakes on this policy, which is causing losses and contributing to higher interest rates.
The QT stance has created a perfect storm of suppressed demand, rising yields, and ballooning costs. The bonds bought during the 2008 banking crash are now worth less, resulting in crystallized losses for the exchequer. Meanwhile, the increased supply of gilts is pushing up interest rates, making it more expensive for the government to borrow.
If interest rates remain on their current path, the Bank’s QT stance could result in total losses of £120 billion to the exchequer by 2031. This figure should give policymakers pause. The Office for Budget Responsibility has estimated that bond sales will add about £47 billion to government debt by 2031.
Even some Bank officials have begun questioning their policy, with reports emerging of plans to overhaul the money-printing program and slow down gilt sales. This is a rare instance of officials acknowledging that they may have gone too far in pursuit of monetary orthodoxy.
Critics argue that the Bank’s QT stance ignores the escalating bill it creates for the government, particularly given the chancellor’s first budget next month. The Cabinet Office chief has pledged to prevent the governor from pursuing policies that actively damage the government’s balance sheet. It remains to be seen whether the chancellor will heed these warnings.
The UK’s experience is not unique. Other central banks have faced similar challenges in their bond-selling programs. For example, the US Federal Reserve stopped actively selling its portfolio of bonds last year, and even the European Central Bank’s QT program has proven more cost-effective than the Bank of England’s. This raises questions about the efficacy of the UK’s approach.
The governor has defended his stance, saying it’s not within the monetary policy committee’s remit to limit costs to the government in the short term. However, this argument rings hollow given the escalating losses and potential impact on the government’s finances.
As policymakers navigate the complexities of monetary policy, they must be mindful of the unintended consequences of their actions. The bond-selling fiasco serves as a stark reminder that even well-intentioned policies can have far-reaching and costly implications. It remains to be seen whether the Bank will take heed of these warnings or continue down the path of QT.
In the coming days, the Bank’s monetary policy committee will meet to discuss interest rates and bond sales. The outcome will shape not only the UK’s economic future but also the very fabric of its monetary policy framework.
Reader Views
- DHDr. Helen V. · economist
While it's encouraging that Bank officials are starting to question their quantitative tightening policy, I'm concerned that the focus is still on tweaking rather than reversing course. The £120 billion in potential losses by 2031 is a staggering figure, but what about the long-term implications for market stability and the economy? As policymakers scramble to address this crisis, they should also consider the opportunity cost of diverting resources from more productive uses.
- TNThe Newsroom Desk · editorial
The Bank of England's QT program has become a reckless gamble with taxpayers' money. While economists are right to warn of the £120 billion losses by 2031, we should also consider the opportunity cost of this policy. By prioritizing monetary orthodoxy over fiscal prudence, policymakers may be sacrificing short-term economic growth for long-term financial stability. A more nuanced approach would balance QT with targeted fiscal measures to mitigate the exchequer's losses and support struggling households.
- MTMarcus T. · small-business owner
The Bank of England's QT policy is like trying to put out a wildfire with gasoline - it may seem counterintuitive but ultimately fuels the very problem they're trying to solve. The £120 billion projected loss by 2031 is staggering, and policymakers would do well to listen to the economists urging them to slow down the gilt sales. What's missing from this narrative is the human cost of these policies on small businesses like mine, which rely on stable interest rates to secure loans and plan for growth.