Is The Bank Of England Broke - And Does It Matter?

The Bank of England, like other Central Banks, is a weird entity, in that it can, if it wants create money. We saw that through the QE programmes, through which it acquired large portfolios of Government Bonds – known as guilts.

The program ran from 2009 to 2022 and was designed to improve financing conditions for companies hit by the 2008 financial crisis. It saw the BOE accrue £895 billion worth of bond holdings while interest rates were historically low.

However, the pace at which the central bank has had to tighten monetary policy in a bid to tame inflation means the costs have risen more sharply than anticipated. Higher rates have driven down the value of the purchased government bonds — known as gilts — just as the BOE began selling them at a loss because bond yields have changed significantly, rising fast as prices fall (as yields and prices work in opposite directions).

The central bank began unwinding that position late last year, initially through halting reinvestments of maturing assets and then by actively selling the bonds at a projected pace of £80 billion per year from October 2022.
Both the Treasury and the BOE knew when the APF was implemented that its early profits (£123.8 billion as of September last year) would become losses as interest rates rose.

Now according to Deutsche Bank, the Bank of England’s losses on bonds bought to shore up the U.K. economy after the financial crisis will be “materially higher than projected until the middle of the decade,”

So should we worry? Well, the Bank of England has a pretty special arrangement with the UK government. Since 2009 it has promised the central bank that it would make good any losses it might suffer from QE, especially after it started sweeping any QE profits back to the Treasury in 2012.

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[djdos]

I think most banks are in the same hole, backed with gov bonds that are rapidly losing value due to rapidly increasing rates

[btiger]

Australia needs its Gold back now, not in England, there are plenty of very secure places in this Country to hold it.

[dan]

GDP is negatively impacted by increasing debt and rising interest rates and by rising energy commodities costs especially oil. While kicking cans down the road has become an art form, there is an increasing pile of cans waiting for the economy. Global crude oil production has declined since 2018 as has liquid fuel production.

[shares]

Hi Martin thankyou for your great works. We received an interesting letter from a large super fund in Australia "REST" saying they are closing the Bond Investment Option to new members from 30th September. Their concern is due to the demand for the bonds ! Can you highlight why they would take this approach in the current financal environment ?

[richarddobosz]

Excellent thank you compulsory listening

[mareecrick]

I've been following the BOE story and also wondering what exactly will this mean. Should I expect to see political spin and QE rebranded, temporary pausing or reduction to interest rates to incentivise borrowing / assist gvt management of debt (not coupled with any real deflation to prices) leading into a second wave of inflation? And how much of the market will sit this one out, simply moving to cash and other perceived safe harbours to wait - further hindering the real productive economy?

[lachlanflawse]

The money 'created' goes somewhere. It flows!!! Given that, as a result of negative RAT interest rates, the private sector is is not saving, then the money, inevitably, ends up in the Current Account contributing to the Current Account Deficit, a depreciated currency and inflation. . As a result, the UK must sell more of its Bonds, Real Estate and Industry to foreigners. So, you end up with higher interest rates, houses that citizens can't afford to buy and foreign control of industry i.e. a loss of sovereignty. There is no 'free' money.

[detectiveofmoneypolitics]

Economic investigator Frank G Melbourne Australia is still watching this very informative content cheers Frank ❤

[davidlindburg]

Taxpayers will always take care of the Bank 🤭

[groundedkiwi]

So what happened to make the Economy by Stronger?

[redsed]

BS its broke! Few more zeros with a stroke of a key!

[shiftyparadigm]

Couldnt follow the logic. Boe buys bonds during govt deficit spending. Govt still running deficit therefore boe is buying bonds to pay the govt which then uses said money to pay boe. Im lost. How is this a problem? Govt still in deficit so its not really tax that is required to pay off loans. Furethermore why would boe sell bonds at a loss rather than holding them till maturity? Inflation shouldn't be a consideration if the money was created in the beginning, then only the numerical values need to add up. Also if boe holds bonds till maturity then interest earned goes back to govt. It seems to me to be grease in the cogs rather than the driving force nor load.

[dangerzone]

Martin you seem to be confused. The UK is not on a Gold Standard.
Alan Greenspan once said there's nothing to prevent the Federal Government from creating as much money as it wants and paying it to somebody. That's because the US government creates its own sovereign currency. That also applies to Britain, Australia and many other countries.
As Beardsley Ruml once declared
"Taxes for Revenue are Obsolete".
This means taxes and borrowing don't pay for anything.
What does this all mean. There's absolutely nothing to worry about because the UK government can just create as much currency as it needs whenever it needs and can never ever go broke creating its own currency. The British taxpayers won't have to pay any extra whatsoever.