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Bank of England hands QE income to Treasury Bank of England hands QE income to Treasury
(35 minutes later)
The Bank of England has said it will hand over to the Treasury the interest it earns on government debt it holds due to its quantitative easing policy.The Bank of England has said it will hand over to the Treasury the interest it earns on government debt it holds due to its quantitative easing policy.
The Bank holds £24bn cash from payments on the £375bn in gilts it holds, a total expected to reach £35bn by March.The Bank holds £24bn cash from payments on the £375bn in gilts it holds, a total expected to reach £35bn by March.
The transfer will cut the government's borrowing needs and the net debt it reports in its financial accounts.The transfer will cut the government's borrowing needs and the net debt it reports in its financial accounts.
The Bank has been buying up government debt from the market with newly printed money in order to boost the economy.The Bank has been buying up government debt from the market with newly printed money in order to boost the economy.
The interest income ultimately belongs to the government under the terms of an indemnity provided to the Bank, but until now, the cash has been sitting unused in a dedicated account - the Asset Purchase Facility (APF) - at Threadneedle Street.The interest income ultimately belongs to the government under the terms of an indemnity provided to the Bank, but until now, the cash has been sitting unused in a dedicated account - the Asset Purchase Facility (APF) - at Threadneedle Street.
"Holding large amounts of cash in the APF is economically inefficient as it requires the government to borrow money to fund these coupon payments," said the Treasury upon announcing the agreement."Holding large amounts of cash in the APF is economically inefficient as it requires the government to borrow money to fund these coupon payments," said the Treasury upon announcing the agreement.
In future, any additional interest payments received by the Bank will be handed back to the Treasury at the end of each quarter, after deducting the Bank's own cost of borrowing.In future, any additional interest payments received by the Bank will be handed back to the Treasury at the end of each quarter, after deducting the Bank's own cost of borrowing.
href="http://www.bankofengland.co.uk/monetarypolicy/Documents/pdf/govletter121109.pdf" >In a letter to Chancellor George Osborne, the Bank's governor, Mervyn King, pointed out that much of the cash may need to be repaid by the Treasury in future. This is likely to reduce the government's budget deficit by about £11bn a year, based on the Bank's current cost of borrowing, according to the BBC's business editor, Robert Peston.
This would occur if the Bank raises its own interest rate - which it uses to set monetary policy - to a level where it is paying more interest on its own borrowings than it is earning on the government debt it holds. That compares with the £116bn public sector net borrowing for the current tax year that was href="http://budgetresponsibility.independent.gov.uk/wordpress/docs/March-2012-EFO1.pdf" >forecast in March by the Office for Budget Responsibility.
In a letter to Chancellor George Osborne, the Bank's governor, Mervyn King, pointed out that the Treasury may well end up repaying the cash, and more, to the Bank in future.
This would occur if the Bank raised its own interest rate - which it uses to set monetary policy - to a level where it was paying more interest on its own borrowings than it was earning on the government debt it holds.
The move comes a day after the Bank decided at a monthly policy-setting meeting not to extend its QE programme.The move comes a day after the Bank decided at a monthly policy-setting meeting not to extend its QE programme.
The Treasury said that the agreement was in line with the practice in the US and Japan, where central banks have been buying up their respective governments' debts as part of a QE programme.