Shankul Bhandare
Proposed changes to the Bank of England’s bond-selling strategy could potentially provide Sir Keir Starmer with up to £11.6 billion annually, as predicted by economists.
This anticipated windfall arises from expectations that the Bank will scale back its quantitative tightening (QT) program in the coming months. QT involves selling bonds acquired during quantitative easing (QE), a measure used to stabilize financial markets and lower borrowing costs during crises like the financial downturn and the pandemic. While QE initially eased financial strain, the Bank is now incurring losses as it sells bonds at a significant markdown, which burdens taxpayers with billions annually.
According to estimates from Deutsche Bank, active bond sales under QT are costing the Treasury approximately £11.6 billion per year. Halting QT, as widely anticipated later this year, would potentially bolster Labour’s spending initiatives under Starmer’s leadership.
Labour’s economic proposals have faced scrutiny for perceived lack of ambition and funding clarity. Additional fiscal room from halting QT could alleviate financial pressures, noted in analysis by Goldman Sachs. Emmanouil Karimalis of UBS argued for suspending active QT, anticipating economic benefits.
Paul Dales of Capital Economics forecasts GDP growth of 1% in 2024 and 1.5% in 2025, with inflation projected to drop to 1.5% by year-end, allowing potential interest rate reductions by the Bank. James Moberly of Goldman Sachs expects a slowdown in bond sales under QT, which could free up fiscal space.
However, not all economists agree on halting QT completely, cautioning that changes may only defer losses rather than eliminate them entirely. Official figures indicate projected QT losses exceeding £100 billion over eight years, significantly impacting government finances compared to other central banks like the Federal Reserve and the European Central Bank.
Christopher Mahon of Columbia Threadneedle suggests alignment with international peers like the Fed and ECB, possibly influencing the Bank’s decision-making under Governor Andrew Bailey.
