How the Bank of England could hand Starmer a £11bn windfall

Bailey Starmer

Changes to the Bank of England’s bond-selling process could hand Sir Keir Starmer up to £11.6bn a year, economists have predicted.

The anticipated windfall stems from the expectation that Threadneedle Street will curtail its quantitative tightening (QT) programme in the coming months.

Not only will this slash the heavy losses incurred from the Bank’s money-printing programme, but it will also boost Labour’s spending plans if it wins power.

As things stand, the Bank is haemorrhaging cash through bond sales, as it reverses its quantitative easing scheme.

This stems from the creation of new money during the financial crisis and pandemic, which paved the way for the Bank to buy new Government bonds.

While this eased strain across financial markets and paved the way for lower borrowing costs, the programme’s consequences are now being felt as the Bank offloads bonds at a considerable loss.

This has drawn scrutiny as the Treasury is forced to pick up the tab from the Bank’s losses, burdening the taxpayer with billions of pounds worth of headwinds each year.

According to calculations at Deutsche Bank, the sale of bonds through quantitative tightening is costing the Treasury around £11.6bn per year.

Therefore, if the process is brought to a halt by the Bank later this year, as economists widely expect, then this will provide Sir Keir with some immediate financial firepower when he needs it most.

So far, the Labour leader’s economic manifesto has come under scrutiny for a lack of ambition, while others have questioned whether its policies are fully funded.

Any further headroom from halting QT could ease financial pressures considerably, as noted by Goldman Sachs in a recent report.

Emmanouil Karimalis, an analyst at UBS, said: “We think there is a strong case to stop active QT.”

It adds to the potential economic good news landing in the Labour leader’s lap.

Paul Dales at Capital Economics predicts GDP growth will accelerate to 1pc in 2024 and 1.5pc in 2025, in a stark turnaround from last year’s brief recession.

He also expects inflation to drop to 1.5pc by the end of the year, which will pave the way for the Bank to lower interest rates from 5.25pc to 3pc.

Mr Dales said as and when the Bank ends active QT that will be good news for the Government’s finances.

“At that point there would no longer be extra losses being transferred from the Treasury to the Bank, so there would be a little bit more money,” he said.

In terms of the Bank curtailing QT in the coming months, Christopher Mahon at Columbia Threadneedle believes Governor Andrew Bailey will be forced to act to keep the Bank of England in step with peers abroad.

He said there is pressure on the Bank to fall in line with the Federal Reserve and the European Central Bank, neither of which are selling bonds or incurring steep losses.

James Moberly, an economist at Goldman Sachs, expects the pace of active bond sales to slow, but not stop – reducing the amount of loss-making sales.

He said: “Given significantly higher redemptions, this implies a notable reduction in the pace of active sales to £13bn, down from roughly £50bn in the preceding twelve months.”

This is significantly lower than what the OBR has forecast, which expects the Bank to sell £48bn of bonds.

“The losses on these sales considerably reduce the government’s fiscal space,” he said, adding that a slowdown in sales would free up at least £10bn.

However, not all economists believe the Bank will stop selling, which in turn has said that any changes to QT will simply delay losses rather than avoid them altogether.

Official figures show that the Government’s QT losses are expected to exceed £100bn over the next eight years, which some economists have said will “dwarf those of other central banks”.

Mr Mahon said earlier this month that Britain is losing three times more on its bond sales than the Fed in the US.

His research found that the Bank’s approach to QE has led to losses of almost 5pc of GDP, compared to 2pc in the US.

By contrast, the European Central Bank’s losses are around 3.3pc of GDP.

He said: “That is putting pressure on the government finances, and means the Government is starting to ask questions to the Bank of England.

“It is too late to salvage most of the losses but we think scaling back active QT could still reduce overall costs for the taxpayer – albeit modestly.”

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