The Bank of England's quantitative tightening (QT) policy could cost the Treasury £120bn, according to information released by the Bank in August. This policy has blurred the lines between monetary and fiscal policy, with ministers facing accountability for decisions they cannot directly control.
Last year, the Treasury paid the Bank £17bn to cover losses from the Asset Purchase Facility (APF), a sum larger than the Ministry of Justice's budget. The APF holds government bonds bought during the Bank's quantitative easing (QE) programme, and the Treasury indemnifies the Bank for any losses or gains.
Losses are generated as the Bank sells gilts at current market prices, which are lower than their purchase price due to higher yields. Additionally, the APF's £500bn bonds generate less income than the repayments on the loan used to buy them, charged at the base rate. Gilts bought above their value are also booked as a loss upon maturity.
The indemnity arrangement, created by Labour after the 2009 crash and made a quarterly cash mechanism by George Osborne in 2012, previously saw the Treasury profit by £124bn when rates were low. However, with rising rates, the uncapped indemnity means the Treasury continues to pay the Bank even after the windfall has been repaid.
Bank Governor Andrew Bailey describes the overall cost of QT as "neutral" when assessed over six decades. However, economist Patricia Pino notes that billions in cash demands fall within a single parliamentary term.