The Treasury should look again at a simple option to save on debt interest

Plain-speaking Economics

The latest monthly data on the UK’s public finances included the first of many payments from the Treasury to cover losses made by the Bank of England’s Asset Purchase Facility (APF). This may seem like an arcane subject, but the sums are huge and at least partly avoidable, so bear with me.

First, the technical details. This is yet another unwelcome hangover from Quantitative Easing. Under QE, the Bank’s APF bought government bonds, or gilts, by crediting the accounts that commercial banks hold at the central bank, using newly-created money. These accounts, known as central bank reserves, pay interest at the Bank Rate, which is currently 3%.

The APF also receives interest on these gilts from the government, like any other bondholder, in the form of coupon payments. When these payments are higher than the cost of the reserves, the Bank has been making a profit which it has paid…

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