RISHI Sunak has been accused of wasting £11 billion of taxpayers’ cash by taking an unnecessary risk with the public finances.
The National Institute of Economic and Social Research (NIESR) said the Chancellor lost the money by failing to insure against interest rate rises on billions of pounds of reserves created through the quantitative easing (QE) programme.
When interest rates then rose, Mr Sunak was caught short.
The Treasury blamed the Bank of England, saying it was up to the Monetary Policy Committee to “take decisions on quantitative easing operations”.
But Professor Jagjit S Chadha from the NIESR told the Financial Times it was the Treasury who had questions to answer.
Between 2009 and 2021, the Bank of England created £895 billion through quantitative easing and spent most, £875 billion, to buy UK government bonds from pension funds and other investors.
The remaining £20 billion was used to buy UK corporate bonds.
When those investors put the proceeds in commercial bank deposits at the Bank of England, the Bank then had to pay interest at its official interest rate.
In July 2021, when the official rate was still 0.1%, the NIESR urged the Government to undertake a large-scale swap of bankers’ reserves at the Bank of England for newly-issued short- and medium-dated fixed-interest government securities.
This swap, they said, would act as an insurance policy against the cost of rising short-term interest rates.
However, that did not happen, and, according to the NIESR, the government “missed the opportunity to buy interest rate insurance when it was unusually cheap.”
Professor Chadha told the FT: “Our calculations illustrate the importance of management of government debt.
"The QE programme has created a huge quantity of short-term liabilities which pay Bank rate and in a hiking cycle have left the Treasury with an enormous bill and heavy continuing exposure to interest rate risk.
“It would have been much better to have reduced the scale of short-term liabilities earlier, as we have argued for some time, and to exploit the benefits of longer-term debt issuance. This is very much a question for the Treasury to answer.”
The Treasury hit back and said NIESR’s analysis risked undermining the independence of the Bank of England.
A spokesman said: “There are long-standing arrangements around the asset purchase facility – to date £120 billion has been transferred to HM Treasury and used to reduce our debt, but we have always been aware that at some point the direction of those payments may need to reverse.
“We have a clear financing strategy to meet the Government’s funding needs, which we set independently of the Bank of England’s monetary policy decisions.
“It is for the Monetary Policy Committee to take decisions on quantitative easing operations to meet the objectives in their remit, and we remain fully committed to their independence.”
Labour said the losses were “astronomical” and accused the Government of “playing fast and loose” with the public finances.
The SNP's Shadow Chancellor Alison Thewliss said there were serious questions to be asked of Mr Sunak:"While households struggle to make ends meet as the Tory-made cost of living crisis spirals out of control, the Chancellor is piling on the hardship with his gross mismanagement.
"At a time when ordinary people need strengthened support to properly tackle record levels of inflation and rising fuel and energy bill prices, Rishi Sunak’s blundering, arrogance and incompetence is instead leaving them to pick up the multi-billion-pound bill.
"The Chancellor's failure to listen to the advice from experts like NIESR has cost us all dearly.
"There are serious questions to answer for the Chancellor over how the public has been forced to pay an eye-watering £11 billion because of the steps - or lack of - taken by the Treasury."
Shadow treasury minister Tulip Siddiq said: “These are astronomical sums for the Chancellor to lose, and leaves working people picking up the cheque for his severe wastefulness while he hikes their taxes in the middle of a cost-of-living crisis.
“This Government has played fast and loose with taxpayers’ money. Britain deserves a government that respects public money and delivers for people across the country.”
However, ex-Health minister Matt Hancock, who used to work as an economist for the Bank of England, described the story as "complete rubbish."
This story in the FT based on an NIESR report is complete rubbish
— Matt Hancock (@MattHancock) June 10, 2022
Having worked in this area before I was in politics I can tell you the story is spectacularly ill-informed
1/3 https://t.co/ofOVrSeJ1i
He tweeted: "Having worked in this area before I was in politics I can tell you the story is spectacularly ill-informed. Setting monetary policy involves judgements about the impact of decisions on markets
"The idea these judgements can simply be 'insured' through swaps fundamentally misunderstands the purpose of monetary and liquidity policy.
"The UK framework is carefully thought out and transparent. The macro consequences of undermining its credibility are much bigger than these tabloid estimates of the direct balance sheet cost. The operation of monetary policy needs informed debate not absurd headlines."
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