International Monetary Fund warns on quantitative easing costs

Eonomists at the IMF found the Bank of England could sustain losses of anything up to 5.5% of GDP, or almost £80bn, when it sells the government bonds back into the market

The Bank of England's recession-busting policy of quantitative easing could end up costing the Treasury up to £80bn – more than outweighing any profits it will make from the scheme, according to new research by the International Monetary Fund.

Policymakers have become increasingly concerned about their "exit strategy" from the unprecedented measures they have used to cushion their economies from the impact of the financial crisis over the past five years.

In a study of the impact of "unconventional" policies, including the Bank's £375bn bond-buying programme, economists at the IMF found the Bank could sustain losses of anything up to 5.5% of GDP, or almost £80bn when it sells the government bonds back into the market.

The Treasury announced last November it would appropriate the interest payments from the Bank's holdings of government bonds, in a move that helped to flatter the public finances. Recent Bank research suggested those cumulative gains could eventually add up to £60bn.

The Bank of England on Threadneedle Street in central London.

 But once the economy looks healthier, the Bank is likely to want to unwind the emergency policy, by pushing up interest rates and selling off its bonds.

The IMF suggests that as soon as central banks signal that they are readying themselves to halt QE, bond prices are likely to fall sharply, as investors "run for the door". Interest rates, which move in the opposite direction to bond prices, would jump and central banks might be forced to push up rates even further to prove they have not lost control of inflation.

"The potential sharp rise in long-term interest rates could prove difficult to control and might undermine the recovery (including through effects on financial stability and investment). It could also induce large fluctuations in capital flows and exchange rates," the IMF warned.

The research analyses the potential losses to central banks under three possible scenarios, from a relatively benign one percentage point rise in interest rates, to a much more dramatic six percentage point increase in short-term borrowing costs.

Under the most extreme scenario the losses to the exchequer would be £80bn, so even if the Bank is right about the £60bn gains for the Treasury from QE, that could still blow a £20bn hole in the public finances.

Economists stressed that any direct costs of QE should be weighed against the wider benefits to the economy. Erik Britton, of City consultancy Fathom, said, "the losses could be large - that much is true, and they would be borne by the taxpayer; but that would only be in a scenario where we were back in growth, and the benefits to the Treasury of that would outweigh those costs."

The IMF's researchers stressed that the prospect of losses on central banks' balance sheets should not prevent them from unwinding their unconventional policies, but warned that, "the path ahead will be challenging, with many unknowns."

The Bank of England questioned the IMF's results, however, saying, "as the IMF report acknowledges, the analysis ignores capital gains and coupon income from bond holdings: that makes the results very misleading".

Azure Global’s vision is to be widely recognized as a reputed firm of financial business advisors, achieving real growth for ambitious companies and to become the first choice for F&A outsourcing for accountancy practices and businesses alike for more info visit our site Azure Global and join us On Facebook

Article source : http://www.guardian.co.uk