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Yahoo
20-05-2025
- Business
- Yahoo
Britain's money-printing experiment turns into a £150bn taxpayer ‘disaster'
The dangers of printing money are well-documented. Too much money chasing too few goods leads to higher prices and lower growth. Hundreds of billions of pounds of so-called quantitative easing (QE) during the financial crisis skewed this perception as the Bank of England repeatedly fired up the printing presses to try to revive the UK's ailing economy. Inflation at first failed to rear its ugly head, until it did. And policymakers and taxpayers are now counting the cost of Britain's £895bn monetary experiment. QE is a process where Threadneedle Street creates money that is used to buy government bonds, known as gilts, to help drive down the cost of borrowing. Commercial lenders then park that cash at the central bank where they earn interest at the current base rate. When interest rates were at record lows of 0.1pc during the pandemic, the Bank earned far more on the returns from government bonds than it had to dish out in interest. By the end of 2021, the Old Lady was in profit to the tune of £123.9bn. But that was quickly eroded when interest rates started rising, with a 'consistently higher Bank Rate' resulting in 'large interest losses' of £18.5bn in the last financial year alone, according to the Office for Budget Responsibility (OBR). But that's not all. The Bank is also actively selling its stockpile of gilts back to the market in a move called quantitative tightening (QT), crystallising billions of pounds of losses for the taxpayer. Many economists, politicians and central bankers believe this is a mistake, as it means that some of the bonds Threadneedle Street bought during the crisis are being sold at knockdown prices. In some of the most extreme cases, bonds bought for the equivalent of £1 have been sold for 28p. These so-called 'valuation losses' will dwarf the money being paid out in interest if the Bank continues to actively reduce its stockpile of gilts by around £48bn a year. The total cost to the taxpayer over the scheme's lifetime is currently estimated at around £150bn by both the Bank of England and OBR. That's the equivalent of a £5,000 tax on each household. QE was never intended to be permanent, but few predicted it would turn out to be so expensive. When then Labour chancellor Alistair Darling first authorised the so-called asset purchase facility (APF) to hoover up £50bn of bonds in January 2009, he assured the public that the assets would be 'held for no longer than is necessary to ensure stability and protect taxpayer interests'. However, more than 15 years after the first tranche of money-printing was put into action, the amount of gilts held in the Bank's asset purchase facility remains at £620bn. Lord King, governor of the Bank at the time, says policymakers have reached for the QE tool too last week, he said: 'I think what that led to was a view that 2016 ... [became], I've got some bad news here, we've voted to leave the EU. If we get bad news, we've got to do something; let's do QE. Pandemic: bad news again, what do we do? Let's do QE. 'But there are some kinds of bad news that do require a monetary policy response and other kinds of bad news that do not justify a monetary response. 'You've got to be able to tell the difference between the two. I think the QE in 2020 went way beyond stabilising markets without any plausible justification for it.' Research published by the National Bureau of Economic Research (NBER) last year blamed active QT, where the Bank sells bonds back to the market before they mature, for raising Britain's long-term borrowing costs by around 0.7 percentage points. Sir John Redwood, a former director of policy for Margaret Thatcher, says the damaging costs of QT are unlikely to prevent similarly bad choices from being made in the future. 'I don't think the authorities learnt anything from this disastrous experiment that is having such a big impact on the public finances,' he says. 'It is self-inflicted harm on a huge scale.' 'The Bank of England has provided no cogent justification for selling bonds for big losses in the market. It says it doesn't have a monetary impact. Well, that is wrong [and] no chancellor has challenged it.' There is a general sense that politicians are starting to wake up to the issue. Rachel Reeves, the Chancellor, wrote to Andrew Bailey last week in a letter that impressed on the Governor three times that the process of reducing the Bank's stockpile of bonds must provide 'value for money'. The Bank's decision to delay an auction of long-term debt after Donald Trump sparked bond market jitters with his tariff tirade shows that it's listening, while the Treasury's Debt Management Office is also moving away from long-term debt. There is another big shift happening in the background that will, with any luck, help the Bank leave behind its radical money-printing era. Instead of buying bonds, the central bank wants to move to a more normalised system of providing cash on demand through what's known as repurchase or 'repo' operations. Paul Tucker, a former Bank deputy governor, says it's time to move away from a reliance on QE to fix crises. 'I think in this country, the Bank has lost the sense of a distinction between a market maker of last resort intervention, where you purchase government bonds, and a QE intervention, where you're purchasing government bonds to stimulate aggregate demand,' he says. 'The bank has, since the liability-driven investment (LDI) episode, gotten closer to what I think should be orthodoxy.' Orthodoxy means actually sticking to the late Darling's principle of temporary and targeted intervention. It turns out that targeted intervention can be quite profitable for the taxpayer. The Bank made £3.5bn by buying almost £19.3bn of long-term government debt following the LDI crisis that threatened pension funds in 2022. Meanwhile, it comes as politicians across the spectrum are paying greater levels of attention to the process of quantitative tightening. Reform has vowed to stop paying interest on reserves held at the central bank in a move it claims could save £35bn a year. However, Bailey warned in a recent speech that this could undermine the Bank's task of keeping inflation low 'and could cause significant harm to the credibility of monetary policy'. In other words, the Bank could lose control. Bailey has also highlighted that moving back to a world where the Bank responds to demand rather than actively buying gilts could make taxpayers more cash. Threadneedle Street takes a small cut every time commercial banks tap the Bank for cash and that money can quickly add up. Sanjay Raja, at Deutsche Bank, says there is a case for winding down the Bank's stockpile of gilts entirely. 'This would, ultimately, reduce the Treasury's transfer payments to the Bank, and reduce the fiscal burden of its QE operations,' he says. Raja also believes the bar for future QE is already higher. 'The effects of QE have been mixed,' he says. 'Concerns on taxpayer value for money have also now come to the fore. 'And given the political attention that QE and QT have attracted, central bankers may be more wary of turning to QE in the first instance – unless, of course, the occasion calls for it.' But don't wave goodbye to QE just yet. One former insider says that while the Old Lady may be scarred by money-printing, that doesn't mean she won't fire up the printing presses again. 'I can tell you that the government of the day were desperate for us to do whatever we could,' they recall. 'They wanted to go much further, much faster, buy all sorts of stuff, and whatever it took to rescue the economy.' So if desperate times fall again, QE may be the Bank's only option – regardless of how much pain it will cause the taxpayer for decades to come. Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month with unlimited access to our award-winning website, exclusive app, money-saving offers and more.
Telegraph
08-04-2025
- Business
- Telegraph
The Bank of England must step in to stop market meltdown
The last few years have been a roller-coaster for central bankers and their reputations. After 15 years of post financial crisis status quo, the pandemic forced them out of their slumber and into action. The Bank of England was widely praised for its decisiveness in slashing borrowing costs as Covid crushed household spending. But Threadneedle Street was just as deservedly lambasted for its pedestrian response to the inflationary shock that followed the end of lockdown and Russia's invasion of Ukraine. The meltdown on global markets is a chance for the Bank and its overseas counterparts to redeem themselves by stepping in to constrain investor panic. An extraordinary $9.5 trillion (£7.4 trillion) has now been wiped off stocks in the three days of trading since Donald Trump declared economic war on the rest of the world. With Sir Keir Starmer and the rest of the Cabinet seemingly clueless as to what to do it may fall to Andrew Bailey to intervene with an emergency rate cut that acts as a circuit-breaker. Economists at Deutsche Bank have described the disruption as 'the biggest shock to the global trading system since the Bretton Woods collapse in 1971' when Richard Nixon took America off the gold standard. The White House can pretend all it likes that this amounts to a genius plan to rewire world trade in its favour, but this is starting to look like little more than wanton destruction – a wrecking ball to the world economy almost for the sake of it, from a man who revels in the extraordinary power he wields. Worse, with the US president shrugging off the tariff turmoil as 'medicine', it is hard to see how or when the devastation will end. Having held on to – naively in my view – the hope that Washington was presiding over a short-lived shock and awe moment that would be quickly followed by a softening of tariffs, that has completely evaporated. Instead, with Trump seemingly doubling down in the form of reciprocal tariffs later this week, traders are now preparing for what billionaire Maga supporter and hedge fund whizz Bill Ackman has warned is tantamount to ' economic nuclear war '. It is against this apocalyptic backdrop that investors are once again desperately looking to central bankers around the world to step in and save the world from oblivion. The betting is now very firmly that a global trade war will be the trigger for a wave of interest rate cuts around the world – and not just one either – including from the Bank of England. The money markets are currently pricing in a 92pc likelihood of a quarter percentage point cut at its next meeting in early May. A further two quarter-point reductions are expected in August and November, with the possibility of a fourth to follow, leaving the base rate at 3.5pc. Previously only two were priced in for 2025 but clearly the world has changed dramatically in recent days, beyond what virtually every world leader, expert and commentator anticipated. The pressure on policymakers to take more resolute steps is as high as it's been since it became obvious that Bailey was wrong about inflation being 'transitory'. The main argument against a loosening of monetary policy this time is that slashing rates would be inflationary in a world where tariffs threaten to send the prices of many goods through the roof. It is the main reason why Jerome Powell, Federal Reserve chairman, looks set to resist Trump's attempts to coerce the central bank into resuming rate cuts. Having been on pause since January, it will probably require a serious weakening of the American economy for the Fed to act again. Some economists think further cuts will be pushed back until much later in the year or even delayed until 2026, unless growing fears of a US recession prove founded. Yet, those same dynamics don't necessarily apply elsewhere, particularly in Britain. Weakening demand, a strengthening pound, and tumbling oil prices all strengthen the case for faster rate cuts. Willem Buiter, a former rate-setter at the Bank's Monetary Policy Committee, recently told The Telegraph that he thinks there will be 'at most a mild inflationary impact [from] the trade war'. Whether that paves the way for emergency action from Threadneedle Street is tough to call. It would be a brave step, not least because the risk is that the White House quickly reverses course and the Bank is left looking like it panicked. Yet nor is it as drastic as it sounds with some central banks on the verge of responding already. Indonesia's central bank said on Monday that it will 'intervene aggressively' in domestic foreign exchange markets when they reopen on Tuesday. In Taipei, Taiwan's central bank said it will act if necessary to ensure the stability of the Taiwan dollar exchange rate, adding that it has 'sufficient ability' to deal with fluctuations. Such statements are an acknowledgement that the uncertainty and chaos are almost as damaging as tariffs themselves. Meanwhile, Freidrich Merz, Germany's incoming chancellor who is locked in ongoing talks about a new coalition government, has warned that the situation in the international stock and bond markets 'is dramatic and at risk of escalating further'. Elsewhere, unfortunate historical comparisons persist as the S&P 500 threatens to rack up three consecutive days of 4pc-plus declines, which would be the first time the benchmark index has entered such territory since the 1929 stock market crash that signalled the onset of the Great Depression. If the markets rout deepens much further, then central banks across the world may have no choice but to take pre-emptive action. As for the assertion of Peter Navarro that the sell-off will eventually turn into a spectacular equities boom, one fears Trump's trade tsar has been standing too close to the fumes from all those markets that have gone up in smoke.
The Guardian
20-03-2025
- Business
- The Guardian
Bank of England holds interest rates at 4.5% amid fears over stubborn inflation
The Bank of England has kept interest rates on hold at 4.5% amid rising global uncertainty and concerns over stubbornly high inflation. The central bank's rate-setting monetary policy committee (MPC) voted to pause its cycle of rate cuts after three previous reductions in the past year. Financial markets had widely expected the MPC to leave rates unchanged on Thursday, after Threadneedle Street in February lowered its key base rate from 4.75% and halved its UK growth forecast. It comes less than a week before the chancellor, Rachel Reeves, will deliver her spring statement to the Commons on Wednesday, at a time when the UK economy is struggling for growth momentum after output unexpectedly fell in January and came close to stalling in the second half of last year. It also comes amid heightened concerns over Donald Trump's trade wars hitting the world economy. UK inflation remains above the Bank's 2% target and is expected to climb further within months as household energy costs increase and businesses react to measures in Reeves's October budget that come into force in April. Industry groups have said the chancellor's planned £25bn increase in employers' national insurance contributions, and a 6.7% rise in the minimum wage from April, could feed through to higher prices. Inflation has fallen from a peak of more than 11% in the second half of 2022 after Russia's invasion of Ukraine triggered a spike in energy costs. But the headline rate has begun rising again in recent months, increasing from 2.5% in December to 3% in January. Threadneedle Street has signalled that borrowing costs are likely to be reduced in the coming months. However, economists have said rates may need to be held higher for longer to squeeze persistent inflationary pressures despite a slowdown in economic activity in the second half of last year. Sign up to Business Today Get set for the working day – we'll point you to all the business news and analysis you need every morning after newsletter promotion More details soon …
Yahoo
14-02-2025
- Business
- Yahoo
‘Rachel from accounts' nickname gives us a bad rap, say accountants
Chancellor Rachel Reeves has earned herself the nickname 'Rachel from accounts' following claims she overstated her economist experience on her CV. But now accountants say the nickname is giving the profession a bad name after the Chancellor's controversial high-tax Budget triggered uproar and economic decline. The Chancellor has never been a qualified accountant, but has claimed to have spent 10 years working at the Bank of England 'as an economist', when in reality she spent less than six years on Threadneedle Street. Accountant Rachel Harris, who runs her own business, said: 'I feel called out. I am Rachel from accounts, so I feel like my full-time job is to actually be the Rachel from accounts and make sure that Rachel Reeves doesn't leave a permanent mark on all Rachel from the accounts.' Ms Harris, who also creates online content about accountancy, said: 'I was initially really excited to have a female chancellor, I think it's a great step for women everywhere to explore careers in politics and especially maths. 'She has had a very difficult job and, as a business owner, I have been underwhelmed and a bit disappointed. Business owners everywhere are underwhelmed and female business owners everywhere are particularly underwhelmed. 'For small business owners everywhere, this being the first big, heavy Labour Budget, it's been really disappointing. But it is important to separate that from the fact that she's a woman, because I think any Labour government would have hit in the same way.' After promising not to increase taxes for 'working people' ahead of the election, Ms Reeves hit businesses with a £25bn National Insurance rise, which critics said would lead to job cuts and cuts to pay. One practitioner, who works at a top 10 accountancy firm, said the nickname was 'unfair' to accountants. He said: 'An accountant would see past the 'girl maths' of the Budget being 'free' because you tax businesses instead of people.' The Chancellor has always rejected allegations that she had embellished her CV. In January, when asked if the nickname upset her, she told Sky News that she had 'been called worse things ... in the end, people are going to judge me on the job that I'm doing now, that I'm doing as Chancellor of the Exchequer'. She added: 'Some people don't want me to succeed. I spend my life proving people wrong, proving that I can do stuff, that I've been underestimated.' Rebecca Beeby, the founder of accountancy firm Altho Dai, said: 'It's definitely misogynistic, the stereotype around accountants is women will have the more junior jobs and we have to push harder for our voices to be heard. 'As a profession, calling us 'accounts' is pretty old-fashioned, modern accountants and finance teams lead business decision-making and drive them forward, we're so much more than the bean counters we used to be seen as.' In 2021, Ms Reeves said in a magazine interview that she had spent a decade working at the Bank of England. She reiterated the claims in a speech at the Labour Party business conference in 2024, saying: 'I spent the best part of a decade as an economist at the Bank of England.' An online profile on career website LinkedIn said that Ms Reeves worked at the Bank of England as an economist between September 2000 and December 2006, across three divisions. She also spent almost a year studying for a Master's degree at the London School of Economics. It also stated that she had worked at Halifax between December 2006 and December 2009. But she actually began working at Halifax in the spring of 2006, the BBC has reported, meaning that the time spent at the Bank of England amounted to less than six years. Ms Reeves's team has previously said that the dates on her LinkedIn profile were wrong, and that the Chancellor had not seen the profile before it was published. In 2024, following criticism of the profile's description of her role at Halifax as an 'economist', it was updated to read 'Retail Banking'. A spokesman for the Chancellor said: 'She worked as an economist at the Bank of England between 2000 and 2006, including over a year at the British Embassy in Washington working in the economics section, and then she worked at HBOS from 2006 to 2009. 'She's proud of the jobs she did and experience she gained before becoming a Member of Parliament.' Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month with unlimited access to our award-winning website, exclusive app, money-saving offers and more.
Yahoo
07-02-2025
- Business
- Yahoo
Andrew Bailey lays bare the damage of Reeves's broken promises
Rachel Reeves promised businesses time and time again before the election that she was on their side. As part of her Mais Lecture last year, the then-shadow chancellor promised a partnership between 'dynamic business and strategic government'. Not only did she vow 'to mobilise all of Britain's resources in pursuit of shared prosperity' but she also offered 'stability too in the tax system'. However, it didn't take long for her promises to unravel, as the Chancellor used her maiden Budget to hammer companies with a £25bn National Insurance tax raid – using the proceeds to help fund a public sector hiring spree. While this may have mobilised one part of the economy, it may not be what private sector bosses were expecting when listening to Ms Reeves's speech last year. In a stinging rebuke to Reeves's entire economic philosophy on Thursday, the Bank of England highlighted how the growing public workforce is draining productivity. According to Threadneedle Street, the economy is on course for its third year without productivity growth, as output per worker – a critical measure that enables rising wages and living standards – is forecast to fall by a further 0.5pc in 2025. Brexit, Covid and the energy crisis were major factors for this recent trend, although the Bank has warned that the problem will persist because of the government-backed boom in public sector employment. At the same, the private sector is struggling. Since the start of 2023, public sector output has grown by almost 4pc, while the private sector has not expanded at all. This is worrying given the private sector's typical growth potential, particularly in contrast to that of the public sector. Worse still, recent policy decisions by the Government mean prospects for the private sector are becoming bleaker. In particular, the shock of the £25bn increase in employer National Insurance contributions has demolished bosses' confidence. Businesses had wrongly believed Labour's manifesto pledge of no National Insurance tax hikes applied to them, meaning many were stunned by October's Budget. Most bosses surveyed by the Bank expect to cover some of that cost by employing fewer staff and raising prices, while a significant chunk plan to offer workers smaller pay rises to offset the tax bill. The Bank of England's analysis indicates the blow from the NICs tax raid will fall most heavily on low-paid workers, and particularly those in consumer-facing jobs. It expects unemployment to rise from 4.4pc at the end of last year to 4.8pc in 2027, dealing a blow to the Chancellor's plans to get more people into work. The simultaneous jump in the minimum wage is also poised to make hiring workers much more expensive. The recent gloom sparked by the Budget has led to businesses warning the Bank that they will reduce investment, which further harms future growth prospects and stifles a revival in productivity. Business investment may have been higher in 2024 than the Bank had anticipated, but it has since cut its forecasts for this year and the following two. This all contributes to lower GDP growth. The Bank believes the economy avoided a recession by the skin of its teeth over winter, while Andrew Bailey, the Governor, also confirmed a drastic reduction in Britain's growth forecasts on Thursday, from 1.5pc to 0.75pc. However, Bailey himself stressed that this was not just because of the Budget, as he pinned some of the blame on productivity. He said: 'On the growth forecast, it is not a judgement on the Budget. The judgement really is that growth has been flat, as measured, since the spring of last year. 'It has left us with quite a few puzzles as to what is going on, particularly because of the way the increase in population will come though and what effect that has. 'We have got more population, we have got more labour force and we have got the same output, so you can only conclude then that you have got lower productivity.' Similarly, the Governor is not entirely opposed to Reeves's plans for the economy. Bailey went out of his way to praise the long-term agenda set out by the Chancellor last week, including her bid to expand airports and build more homes. He said: 'I am a very, very strong supporter both of the growth agenda this Government has, and by the way of the growth agenda the previous government had as well. 'The potential growth rate in the UK has been low since the financial crisis. Addressing those questions is critical. I very strongly agree with the Chancellor on this point.' The danger is that those plans will take years to come off. 'Structural policies take time to come through,' said Mr Bailey. 'When we are looking at a two- to three-year horizon here you would not expect a lot of that to come through quickly. 'But I don't for a moment want to leave you with the thought that therefore it doesn't matter - it does matter.' It leaves the Chancellor –and, more importantly, the rest of us – facing the prospect of a middling economy for years to come as the cost of higher taxes and a bloated public sector hit home. Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month with unlimited access to our award-winning website, exclusive app, money-saving offers and more.
