More money problems for the UK

We are also watching developments at the BOE. The UK Treasury is set to transfer more than £11bn to the BOE to cover projected losses in its bond buying programme. It marks the reversal of a decades long trend where transfers were flowing the other way, with the BOE transferring £120bn to the Treasury over the last 12 years. The BOE had made a packet from its bond purchases, but as the bond market bull market ends, the BOE is selling bonds at lower prices than they bought them for. The BOE’s annual loss could top £20bn next year, as the BOE is on the hook to pay interest on reserves held at commercial banks. The BOE’s QE programme was designed so that for all bonds purchased under the programme, an equivalent amount of money was kept at commercial banks. As interest rates rise above the average level of the coupons on the bonds owned by the BOE, the BOE is on the hook to pay the difference – hence the transfers. If interest rates rise substantially higher to 5% in the next year or so, the BOE’s bill could top £40bn. This comes at a time when the UK; s finances are already stretched, so we will be watching this development and how it pans out if rates must rise by more than expected.