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By Sir John Redwood on June 9, 2025
I have been talking about huge Bank of England losses and the need to curb them for the last two years on this site. Now the Telegraph is reporting them as well, and Richard Tice has written to the Bank about them.The BBC when I last briefed them again about it told me no one reported it because they did not understand it . Let’s have another go at explaining.
After the banking * crash, briefly after Brexit and extensively after the pandemic out break the Bank created money to buy up £875 bn of government bonds. They paid high prices for them.
When bond prices rise the interest rate falls and vice versa. The Bank bought the bonds to drive the prices up and the interest rates down. If the government borrows £100 for a very long time at 1% it promises to pay £1 a year interest on that £100 bond. If rates fall to o.5% the bond price rises to nearly £200 so the £1 of interest is now 0.5% of the value. If rates rise to 2% the £100 bond falls to nearly £50 so £1 of interest is 2% of value.
Now the Bank is sitting on big losses as it has put interest rates up a lot and gas been selling bonds to drive their prices down. It js losing money three ways.
Selling depressed bonds in the market at big losses. There is no need to do this. The Bank could hold the bonds until they mature and repay at their original issue value. This is what other Central banks are doing.
Losing less on the bonds it holds to maturity. It is still losing on many of them which it bought above initial issue and repayment value
3 Paying more to commercial banks who deposit money with it than it gets on interest on the bonds it has bought with the money.
Tomorrow I will explore how far the Bank could go in reducing these losses.
How could the Bank of England cut its losses on bonds?
By johnredwood on June 10, 2025
Last night on GB News I set out again how I would cut Bank of England losses on bonds.
The first thing to do is for the Chancellor to tell the Bank she will not pay for any more losses from selling bonds in the market. No other central bank does this. There is no stated good purpose for the policy.The Chancellor’s permission was needed for the purchase, and the Treasury guarantees against loss.This gives her the right to order a stop to sales.m
The second is to raise with the Bank the running losses where the Bank spends far more on interest on commercial bank deposits than it receives in interest on the bonds which were bought at very high prices when interest rates were much lower. The ECB for example pays a lower rate of interest on its deposits than its lending rate . The Bank of England has the same rate for lending and borrowing. The Bank could require a minimum level of reserve deposits by commercial banks at zero interest