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Quantitative Easing · 7 of 9

The Cost of Quantitative Easing

Explain why quantitative easing first paid the Treasury and then began to cost it, why the Treasury carries the losses and what that does to the line between the Bank and the government, and why economists still disagree about whether it helped cause the inflation of 2022.

Before you start

What you'll be able to answer

  1. Why did the purchases first pay the Treasury and then start costing it?
  2. Who carries the losses, and why does that tie the Bank's interest rate decisions to what the government pays?
  3. Did the purchases help cause the inflation of 2022?

Where this sits

Quantitative Easing · this module is lit

  1. 1998The Bank of England Act gives interest rate decisions to a committee at the Bank; the Chancellor keeps the target
  2. Mar 2009Bank Rate is cut to 0.5 per cent, and the Bank starts buying government bonds with newly created money
  3. Aug 2013The Bank says it will not consider raising interest rates at least until unemployment falls to 7 per cent
  4. Mar 2020Bank Rate is cut to a new low
  5. Jan 2022Banks' reserves at the Bank reach their highest level
  6. Sep 2022The Bank buys government bonds again, to stop forced selling by pension funds
  7. Oct 2022Consumer price inflation reaches 11.1 per cent
  8. Nov 2022The Bank starts selling its bonds to investors, among the first central banks to do so
  9. Aug 2023Bank Rate reaches its peak after rises at consecutive meetings
  10. Apr 2026The Governor writes an open letter to the Chancellor after inflation overshoots the target

In 2012 the Bank's gilts were earning more than they cost

In November 2012 the company that held the Bank of England's gilts (government bonds) had a growing pile of cash from the interest on those gilts. The Chancellor, George Osborne, and the Governor of the Bank, Mervyn King, had to settle what to do with the surplus.

Predict first

The company earns interest on its gilts. It pays Bank Rate, the Bank of England's own policy interest rate, on the money that bought them: reserves, which the Bank created and which commercial banks hold at the Bank. When do you think it makes a surplus?

The purchases made a surplus while Bank Rate stayed low

The gilts are held by the Asset Purchase Facility (APF), a company inside the Bank. Each gilt pays the APF a fixed rate of interest, set when the gilt is first issued. The Bank pays Bank Rate on the reserves and charges the APF Bank Rate on the loan that bought its gilts, and that rate can change. From 2009 Bank Rate stayed below the interest the gilts paid, so more came in than went out.

Since 2009 the surplus had built up inside the APF. The Treasury had promised to cover any loss the APF made, so its gains and losses belonged to the government in the end.

The Treasury could leave the surplus in the APF or take it

By November 2012 the APF had grown much larger, and was expected to last much longer, than at the start. Its surplus was sitting on deposit. Passing the cash to the Treasury would let the government pay off some of its debt now. But the Governor expected that once Bank Rate rose and the gilts were sold, most of that money would have to be paid back. Leaving it in the APF would keep it where those later losses would fall.

Your decision

You are the Chancellor in November 2012. What do you do with the surplus?

The payments ran to the Treasury for a decade, then turned round

The payments to the Treasury added up to £123.9 billion at their peak, at the end of September 2022. By then Bank Rate was rising. The Bank pays Bank Rate on the reserves and charges the APF Bank Rate on the loan that bought its gilts, and that cost was overtaking the interest on the gilts. In October 2022 the Treasury made its first payment to the APF, and it has paid every quarter since.

By the end of June 2026 the net total passed to the Treasury, counting the surplus built up since 2009, was £16.2 billion, and the Bank expects further payments from the Treasury until the gilts are all sold. The Bank also argues that the purchases cut the government's borrowing costs, which on one set of its assumptions makes up for much or all of those payments.