MNI: UK Lawmakers Ask Govt For Details Of BOE Indemnity Deal

UK lawmakers have asked the government to reveal the terms of the agreement detailing how it would indemnify the Bank of England for any losses made on its quantitative easing programme, and to clear up uncertainty which a legal expert told MNI left a "floating derivative" on the Treasury's balance sheet.

When the BOE first launched quantitative easing in March 2009, policymakers stressed that any losses would be picked up by the government. But the Deed of Indemnity underpinning the arrangement has been kept under wraps, and the House of Lord's Economic Affairs Committee (LEAC) wrote last week to Chancellor of the Exchequer Rishi Sunak demanding to know why.

Meanwhile, it remains unclear when the indemnity would take effect if the BOE runs up losses, said WillBateman, a professor of law at the Australian National University whose written evidence alerted the LEAC to the issue.

"It is unclear when the indemnity would kick in and it is also unclear when the BOE can call on the indemnity, leaving a floating derivative on HMT's balance sheet," Bateman said.

"As the Deed appears to set the legal limits of QE in the UK it should be a public document, in the same way that the legislation authorising the BOE to engage in monetary policy operations is also public. There is a very basic legitimacy problem with secret laws."

So far, QE has been profitable, but as the Covid shock fades and yield curves move higher the prospect of losses becomes more probable, perhaps even, according to National Institute of Economic and Social Research head Jagjit Chadha, rendering the Bank insolvent.

REMUNERATION ON RESERVES

The question mark over the Treasury's financial commitments comes as prominent figures including former Monetary Policy Committee member Charles Goodhart have suggested that the government might at some point force the BOE to eliminate remuneration on its reserves. As the economy improves and the Bank raises its official interest rate, this will push up the cost to the public sector of bonds acquired by reserves under QE, making the temptation for officials to force the elimination of reserve remuneration impossible for the government to resist, Goodhart argued.

BOE Governor Andrew Bailey and colleagues have publicly pushed back against any suggestion of an end to reserve remuneration, arguing that this would jeopardise nearly a quarter of a century's progress in monetary stability, and Bateman said such a move would be legally difficult for the government to make.

While the Treasury has the power to override monetary policy decisions under section 19 of the Bank of England Act 1998, this is only if "after consultation with the Governor of the Bank … [officials] are satisfied that the directions are required in the public interest and by extreme economic circumstances," Bateman pointed out.

The key legal takeaway is that "politicians can gripe about reserve remuneration, but unless HMT decides to invoke extreme legal override powers, the Bank remains in control," he said.

An LEAC spokesperson told MNI Friday that they had yet to receive a response from the Chancellor on the Deed of Indemnity. The LEAC, which includes former BOE Governor Mervyn King among its members, is currently working on its report into QE.