/ world today news/ A year ago, an important event took place in the world of money and finance, which was not noticed by many. This event was reported by the Bloomberg news agency in its article dated October 19, 2022, which was titled “UK Treasury to transfer 11 billion pounds to Bank of England (BA) to cover quantitative losses”. Citing its sources, the agency said more than 11 billion pounds sterling ($12.4 billion) would be transferred to the Bank of England (Bank of England) at the end of the financial year to cover projected losses. And the losses occurred as a result of this rapid depreciation of BA’s assets, formed in part by the purchase of Treasuries and corporate bonds.
The purchase of securities took place within the framework of the quantitative easing program, the main feature of which was the extremely low basic interest rates of the BA. Accordingly, interest rates linked to the Central Bank’s main interest rates were purely symbolic.
In the run-up to the global financial crisis of 2008-2009, the Bank of England set the prime rate at 5.75% (decision made on 07/05/2007). Then, as the country was involved in the financial crisis and during its development, the prime rate was successively reduced. On August 4, 2009, it was reduced to 0.50%. After that, for about 8.5 years, the BA kept the prime rate at about the same level. Sometimes a slight increase to 0.75%; sometimes, on the contrary, it drops to 0.25%. The Bank of England followed the global trend. Most of the world’s leading central banks also followed a soft or even ultra-soft monetary policy. Ultra-loose monetary policy – when the central bank cuts the key interest rate to negative (the central banks of Switzerland, Japan, Denmark and Sweden have done this, the Bank of Japan’s key rate is still minus 0.10%).
Between 2009 and 2021, BA bought £895 billion of government and corporate bonds to provide economic support after interest rates were cut as low as possible. At the same time BA even got some profit (because interest rates on liabilities were even lower than on assets). From 2009 to 2022, the Bank of England transferred around £120bn of profits to the Treasury. On average, this equates to almost £10 billion a year. The blissful time for all lasted about 12 years.
As the article notes, the fall in bond prices following last spring’s sharp rise in interest rates has seen the remaining £838bn par value government bond portfolio suffer market losses of around £200bn.
The transition of central banks from quantitative easing (QE) to quantitative tightening (QT) began in 2022, when inflation was seriously raging in the world. Almost all central banks began to resort to the usual method of suppressing inflation – by raising the base rate. The Bank of England was no exception. On 17 March 2022, the Bank of England’s main interest rate was raised from 0.50 to 0.75%. There were several more increases during the year, reaching 3.50% on 12/15/2022.
There were five more promotions this year. As a result of the last one (08/03/2023), it reached a level of 5.25%. By the end of the year, according to experts, it may rise to 5.75%. The Bank of England is keeping pace with other leading central banks. So the US Federal Reserve currently has a base rate of 5.25-5.50%. The European Central Bank has 4.50%. Canada has 4.00%. The Reserve Bank of New Zealand has 5.50% and so on.
All these central banks (such as the Bank of England) have a significant part of their assets in Treasuries (and to some extent also corporate bonds and other securities) acquired at a time when the interest rate on them was token. Today, new issues of treasury and other securities no longer have nominal interest. Therefore, assets made up of old securities are depreciated. The restructuring of liabilities at new interest rates happened much faster, so the interest margin on active and passive operations began to acquire a negative value. In effect, these are losses of the Central Bank which are not apparent while they are in the Central Bank’s portfolio, but which become real at the time of the sale of such securities. Experts predict heavy losses for many central banks. Moreover, these are losses that central banks cannot handle alone. Therefore, it is expected that sooner or later the hidden losses will become apparent. And to cover them, you will have to resort to state aid.
And it seems that the Bank of England, which is considered one of the oldest (along with the Bank of Sweden, founded in the 17th century), became the first sign in this difficult time for central banks. I mean it’s the first to get help from the state (treasury) late last year to cover losses as a result of the switch from quantitative easing to tightening.
In the article it is noted that at the time of publication of the article the amount required by the BA has already been transferred – 828 million pounds. This is an advance. The rest must be translated after approval by parliament (a decision was expected within days). I note in passing that according to later media reports the entire amount of 11.175 billion pounds was transferred by the British Treasury to BA. The article cites a Bloomberg estimate that BA’s losses in 2023 could exceed 20 billion pounds.
After last year’s October publication of “Bloomberg”, there was a big pause in the coverage of BA’s losses. This year, the silence was broken by an article in Britain’s Financial Times on July 26, titled “UK government faces £150bn bill to cover BA of England losses from quantitative easing”. The article notes that in April 2023, the total loss from the sale of the entire portfolio of securities bought by BA during the quantitative easing period is estimated to be £100 billion. However, with continued and expected quantitative tightening, losses could rise to 150 billion. It is noted that the parliament is preparing a law according to which the Ministry of Finance will have to pay all losses incurred by BA. The main sell-off of BA’s portfolio and the main transfers of money from the Treasury to the central bank are expected to take place in 2023, 2024 and 2025. The government will pay around £40bn a year over this time period (which is around £10bn a year more than expected in April).
Some other sources estimate possible payments to BA from the treasury even higher than those mentioned above. More specifically, it is claimed that the amount is 230 billion pounds, which is equal to approximately 10% of the country’s GDP. Such markups are based on the assumption that the BA will continue to raise its key interest rate at the same pace as it did after the transition from quantitative easing to tightening.
Other central banks face the same predicament today. There are many publications about the Federal Reserve. The total hidden losses of the US Federal Reserve (which will become clear when securities are sold) exceed $1 trillion. The operating losses of the US central bank due to the depreciation of the portfolio of securities at the end of 2023 will exceed 100 billion dollars. By the way, this is the second time in more than a century of history of the Federal Reserve system, when the American central bank ends the year with a negative financial result (the first case was registered in 1915).
In October of this year, the data on the losses of the Central Bank of Sweden were published. They “ate” all the equity capital of the Swedish Central Bank. Its value became negative – minus 18 billion crowns. According to current legislation, when a bank’s capital falls below 20 billion kroner, it must apply to parliament for recapitalization. And the parliament, for its part, must give the command to the Swedish treasury to allocate money to replenish the capital to the regulatory level. According to the “Bloomberg” agency, the Swedish parliament has begun preparing a draft law to provide financial assistance to the Central Bank from the state budget. The exact amount of the aid will be determined after the central bank’s 2023 financial report is presented to parliament.
There are forecasts of losses for a number of other central banks. But according to experts, the US Federal Reserve will not turn to the country for help. The Fed’s losses will be covered by the “printing press” given the privileged status of the dollar (the international reserve currency). Other central banks are still carefully (without advertising, so as not to sow panic) calculating current losses and assessing possible future losses. And only BA, which is one of the oldest central banks in the world, already receives state aid to cover losses. Before our eyes, the idea of central banks as “lenders of last resort” proudly declaring that they can and should be “independent of the state” is crumbling. This is a clear sign that the old model of central banks is a thing of the past. In the near future, the world may see a completely different type of central bank.
Translation: V. Sergeev
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