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Treasury raids QE programme for £35bn cash boost

Treasury 480

The public finances are set to receive a huge cash boost as the Treasury raids the Bank of England for the interest earned on gilts purchased through quantitative easing.

The Bank of England’s QE programme has purchased £375bn worth of gilts since 2009 but the interest earned has remained unspent in the Asset Purchase Facility.

At the end of March this year the surplus cash in the APF was £24bn with a further £11bn expected this year, cutting public debt and deficit forecasts ahead of the autumn statement on 5 December.

The move will see all interest payments since 2009 transferred with future transfers taking place on a quarterly basis. Any income from gilt interest will be used solely to pay down Government debt.

Chancellor George Osborne says it is “economically inefficient” to keep the money in the APF and the new approach is in line with other countries such as Japan and the United States.

In a letter to Bank governor Sir Mervyn King Osborne states: “Holding large amounts of cash in the APF is economically inefficient as it requires the Government to borrow money to fund these coupon payments. Transferring the net income from the APF will allow the Government to manage its cash more efficiently, and should lead to debt interest savings to central Government in the short-term.”

The Treasury says that when monetary conditions normalise cash flows may be reversed to keep the APF capable of funding any capital shortfalls. Any future losses incurred by the APF will be met in full by the Government.

Former Monetary Policy Committee member Andrew Sentance says: “Monetary policy now has fiscal consequences. When/if BoE unwinds QE, the deficit will look worse.”

Shadow Treasury chief secretary Rachel Reeves says: “This smoke and mirrors will fool nobody. We will look very closely at how the Office for Budget Responsibility and Office for National Statistics account for this change and whether it ends up costing the taxpayer more in the long-term.

“People will want to see public sector net borrowing figures without the impact of this change, so they can make proper comparisons and judgements.”

Yesterday’s meeting of the Monetary Policy Committee was made aware of the changes and agreed it would not affect its ability to set monetary policy.

King’s reply to Osborne’s letter states: “The committee noted that its policy setting would need to take account of the effect of this action, which amounts to a small loosening of monetary conditions.”

The MPC decided against more QE this month and kept interest rates at 0.5 per cent. QE is also the subject of an inquiry from the Treasury select committee.


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