Bank of England governor defends QE policy against Reform claims

Times

23-06-2025

Andrew Bailey has hit back against Reform UK's claim that its bond-selling scheme and remuneration of commercial bank reserves were tantamount to a 'systemic misuse of taxpayers' money'.
The governor of the Bank of England said in a letter addressed to Richard Tice, Reform UK's deputy leader, that 'the UK will keep the benefit of lower debt costs for considerably longer than other countries' owing to the central bank's quantitative easing (QE) programme.
Bailey said that the government 'issued much more long-term debt than other countries when interest rates were low and QE had flattened the yield curve', meaning that it will receive 'a longer-lasting benefit in the form of lower debt costs'. The letter was published on Monday but written last Friday.
In a letter to Bailey this month, Tice took aim at the Bank of England's bond-selling plans and remuneration of commercial banks' deposits at the central bank, claiming that the policies would unnecessarily cost the taxpayers tens of billions of pounds.
The Bank of England pays interest on commercial banks' deposits, which is determined by the level of bank rate, presently set at 4.25 per cent. This means that, as the central bank raised the base rate to tame aggressive inflation since late 2021, it had offered a higher average interest rate to commercial banks on their deposits compared to the average interest rate it had across its bond portfolio.
In addition to this, the central bank is often selling bonds that it bought under QE at a lower price than it paid for them.
According to latest estimates from the Bank of England, losses on bond sales will amount to about £150 billion, the cost of which the government covers under an indemnity agreement. Between 2013 and 2022, the Bank of England sent £124 billion of profits earned from its QE programme to the government, Bailey noted in his letter.
In the wake of the 2008 financial crisis, central banks launched massive bond-buying packages in a bid to stabilise the global economy, a process known as quantitative easing. The measures were revived and ramped up during the Covid-19 pandemic.
By raising demand for bonds, central banks are able to increase their price, which pushes down their yield. These lower yields filter through the rest of the economy, which, in theory, stimulates household spending and business investment, thereby reviving economic growth.
Bailey said that Tice had overlooked the potential economic costs if the Bank of England had not enacted QE to aid the economy during these shocks.
He said: 'It is easy to forget the severe problems we faced with these shocks. Although the counterfactual is unknowable with any precision, most estimates indicate that QE provided very significant support to the UK economy, protecting both jobs and tax revenues.'
The Bank of England owned nearly £900 billion worth of government and corporate bonds at the peak of its QE programme.
The central bank has been both selling bonds and allowing them to mature as it gradually shrinks the size of its balance sheet. Under present plans, the Bank of England will either sell or allow bonds to mature at an annual pace of £100 billion.
Reform UK was contacted for comment.