The big story of Bank of England is a relaxation in the tightening to avoid massive losses | Money news Aitrend

For the most part, when people think of the Bank of England and what it does to control the economy, they think of interest rates.

And it is quite understandable. After all, influencing inflation by increasing or lowering the borrowing costs in force through the United Kingdom was the main tool of the bank for the vast majority of its history. There are series of data on interest rates in the archives of the bank which date back to its foundation in 1694.

But illustrated the Bank of England As being mainly on interest rates is no longer entirely true. On the one hand, these days, he is also responsible for regulating the financial system. And, even more relevant for the widest economyHe is engaged in another policy with enormous consequences – both for the markets and for the public bag. But as this policy is quite complex, little outside the financial world are even aware of it.

Money Dernited: What the interest rate means to you

This project is a quantitative softening (QE) or, as it is better known today, a quantitative tightening (QT).

You may remember the QE of the financial crisis. It was, in short, what the bank did when interest rates fell to zero and it needed an additional tool to inject a little punch into the economy.

This tool was Qe. Essentially, this involved creating money (electronic printing) to buy assets. The idea was twofold: first, it means that you have more money slipping into the economy – an important concept given the great depression of the 1930s had been associated with a sudden shortage of money. Second, it was designed to try to reduce interest rates that prevail in the financial markets – in other words, not the interest rate set by the Banque of England but yields on long -standing bonds like those issued by the government.

The bank therefore printed a lot of money – hundreds of billions of pounds – and bought hundreds of billions of assets. He could have theoretically spent this money for anything: actions, actions, debt, housing. I calculated a few years ago that with the sums she spent, she could theoretically buy all the houses in Scotland.

But the assets he chose to buy were not Scottish houses, but the state obligations, mainly, he said back at the time (it was in 2009) because they were the most available asset. This had some deep consequences. The first was that from the start of the QE was a technical policy that most people did not understand completely. Everything happened under the radar on the financial markets. No one, with the exception of banks and funds selling state bonds (nicknames, as we know) has ever seen money. The second consequence is that we are starting to count with today.

Rolling over a decade and a half and the Bank of England had around 895 billion pounds sterling of bonds sitting on its balance sheet, bought during the various qe pushes – a few thrusts during the financial crisis, another following the EU referendum and more during the cocvid. Some of these obligations were purchased at low prices but, in particular during the pandemic, they were purchased at much higher prices (or, since the return on these obligations moves in directions opposite to the price, to lower yields).

Then, three years ago, the bank started to reverse the QE. This meant selling these obligations. And although he bought many of these obligations at high prices, he sells them at low prices. In some cases, he has lost amazing amounts on each sale.

Take the 2061 golden. He bought a slug of them for £ 101 by Empat il and sold them for £ 28 the song. Therefore, achieving an amazing loss of 73%.

Tot everything and you talk about losses, following the reversal of QE, of several billion pounds. At this point, it is worth calming your sense of these major numbers. In general, 10 billion pounds sterling are a lot of money – equivalent to approximately an additional penny on income tax. The fiscal “black hole” that Rachel Reeves faces the upcoming budget, according to whom you ask, perhaps 20 billion pounds sterling.

Well, the total losses expected on the quantitative tightening program of the Bank of England (“tightening” because it is the opposite of softening) is a huge 134 billion pounds sterling, according to the Budget Office.

Now it is worth saying first that, as things are at least, all these losses have not been crystallized. But over time, it should lose what is, to say it lightly, amazing sums. And these are sums that are underway and will be paid by British taxpayers in the years and decades to come.

Now, if you are the Bank of England, you argue that the cost was justifiable given the extent of the economic emergency which is faced in 2008 and from. Looking at it only in terms of budgetary losses is to miss the point, they say, because the alternative was that the bank does not intervene and the British economy would have faced hideous levels of recession and unemployment during these periods.

However, there is another more subtle criticism, recently expressed by economists like Christopher Mahon in Columbia Threadneedle Investments, namely that the bank was reckless in its strategy for the sale of these assets. They could have, he argues, have sold these obligations less quickly. They could, moreover, could have more cautious when buying assets so as not to invest with all my heart in a single class of assets (in this case state obligations) which could be sensitive to the future of interest rate changes.

More obviously, there are other central banks – including the Federal Reserve and the European Central Bank – which have abstained from actively selling the obligations in their QE portfolios. And, by coincidence or not, these other central banks have undergone much lower losses than the Bank of England. Or at least, it seems that they did – trying to calculate these things is evil.

But there is also another consequence in all of this. Because if you sell a long -standing government bonds of government bonds, then all other equals, this would tend to increase yields on these obligations. And that brings us back to the big problem that so many people are obsessed at the moment: very golden yields. And it turns out that the same time the long-term golden yields of Great Britain began to take off higher than most other central banks was the moment when the bank started in the quantitative tightening.

But (the plot thickens) that moment was also the precise moment of the mini-budget of Liz Truss. In other words, it is very difficult to take off precisely the quantity of divergence from British borrowing costs in recent years in Liz Truss and how the Bank of England.

Anyway, maybe you see the problem now. This incredibly technical and esoteric economic policy could have enormous consequences. All this brings us to the bank’s decision today. By reducing the rate to which he sells these obligations on the market and – just as important – by reducing the proportion of long -standing bonds (for example, around 30 years) that it sells, the bank seems to recognize tacitly (without really recognizing it) that the plan did not work – and it is necessary to change track.

However, the extent of change is smaller than many would have hoped. So, questions about the question of whether the bank’s QT strategy was an expensive error is probably stronger in the coming months.