MNI BRIEF: BOE QE Losses May Surge, UK Finances Shaky - OBR ​

The Office for Budget Responsibility in its Fiscal Risks Report highlighted the vulnerability of UK public finances to higher interest rates and warned that the losses over the remainder of the Bank of England asset purchase programme could surge as quantitative tightening proceeds.

The BOE's quantitative easing programme effectively switched public sector interest payments on gilts for floating rate payments on central bank reserves, funded at Bank Rate, and as Bank Rate has surged from near zero to 5% potential losses have surged with the OBR stating that losses might be GBP55 billion larger than its previous estimate of GBP63 billion in its March forecasts.

One benefit of quantitative tightening is that it will at least raise the average maturity of UK debt, as gilts are sold back to the market, with the OBR noting that the median maturity of public sector liabilities (the time taken for half the stock to respond to interest rate changes), fell from around seven years to just two years by 2022 but under QT could reach six years in 2027.

The OBR also highlighted the UK's exceptionally high level of inflation linked gilt stock compared to other advanced economies, making the UK more vulnerable to the surge in inflation, with central government debt interest costs rising by GBP89 billion (3.4 per cent of GDP) due to the impact of inflation on the stock of Inflation Linked Gilts across 2021-22 and 2022-23.