(Bloomberg) -- The Bank of England is reducing the cash buffer it holds against unexpected losses as it unwinds its quantitative easing bond-buying program, in a move UK officials said would provide taxpayers better “value for money.”
Governor Andrew Bailey and Chancellor of Exchequer Rachel Reeves agreed the new arrangements in an exchange of letters that accompanied the latest projections for lifetime losses on the BOE’s asset-purchase facility. That’s the vehicle through which it originally bought £895 billion ($1.1 trillion) of bonds to boost growth and stave off deflation over the 2008 financial crisis and 2020 pandemic.
Reeves said “the level of cash held in the APF should be slightly re-calibrated and reduced, in light of changes to the size and composition of APF holdings.” Since early 2022, the BOE has shrunk the APF to £655 billion as bonds mature and expire or are sold through so-called quantitative tightening.
The reduction in the cash buffer potentially gave Reeves a little extra money to spend in the budget delivered on Oct. 30. The UK’s fiscal watchdog accounted for the change in its analysis of the spending plan. Deutsche Bank AG Chief UK Economist Sanjay Raja said the sums would’ve been small compared with the big changes in interest rate expectations and yields since then, “which will have largely wiped out the Chancellor’s headroom.”
The BOE refused to reveal the size of the cash buffer.
The BOE’s QE operation is on track to make a lifetime loss of around £130 billion, the BOE’s latest analysis suggests. The BOE made a £123 billion profit when interest rates were near zero, but started losing money when rates climbed above 2% in 2022. In today’s money, the lifetime losses amount to between £50 billion and £100 billion, the BOE’s Asset Purchase Facility Quarterly Report showed.
“Cash management arrangements for the APF are kept under review by the Bank of England and HM Treasury to ensure that they support government cash-management objectives of efficiency and that they provide value for money,” Reeves said. The changes will slightly alter the quarterly profile of cash transfers from the Treasury to cover the losses being sustained on the BOE program but will “not change the overall lifetime position of the APF,” she said.
Bailey said: “Over time, the size, timing and nature of cash inflows and outflows for the APF have evolved, changing how the APF’s cash buffer is needed to meet expected outflows. As a result, the Bank and HM Treasury have agreed an operational change to how the level of cash held in the APF is determined.”
--With assistance from Greg Ritchie and David Goodman.
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