The big story from Bank of England is an easing in tightening to avert massive losses
For the most part, when people think about the Bank of England and what it does to control the economy, they think about interest rates.
And that’s quite understandable. After all, influencing inflation by raising or lowering the prevailing borrowing costs across the UK has been the Bank’s main tool for the vast majority of its history. There are data series on interest rates in the Bank’s archives that go all the way back to its foundation in 1694.
But depicting the Bank of England as being mostly about interest rates is no longer entirely true. For one thing, these days it is also in charge of regulating the financial system. And, even more relevant for the wider economy, it is engaged in another policy with enormous consequences – both for the markets and for the public purse. But since this policy is pretty complex, few outside of the financial world are even aware of it.
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That project is quantitative easing (QE) or, as it’s better known these days, quantitative tightening (QT).
You might recall QE from the financial crisis. It was, in short, what the Bank did when interest rates went down to zero and it needed an extra tool to inject some oomph into the economy.
That tool was QE. Essentially it involved creating money (printing it electronically) to buy up assets. The idea was twofold: first, it means you have more money sloshing around the economy – an important concept given the Great Depression of the 1930s had been associated with a sudden shortage of money. Second, it was designed to try to bring down the interest rates prevailing in financial markets – in other words, not the interest rate set by the Bank of England but the yields on long-dated bonds like the ones issued by the government.
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Bank of England’s decision in 90 seconds
So the Bank printed a lot of money – hundreds of billions of pounds – and bought hundreds of billions worth of assets. It could theoretically have spent that money on anything: stocks, shares, debt, housing. I calculated a few years ago that with the sums it forked out, it could theoretically have bought every home in Scotland.
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But the assets it chose to buy were not Scottish homes but government bonds, mostly, it said back at the time (this was 2009) because they were the most available liquid asset out there. That had a couple of profound consequences. The first was that from the very beginning QE was a technical policy most people didn’t entirely understand. It was all happening under the radar in financial markets. No one, save for the banks and funds selling government bonds (gilts, as they’re known) ever saw the money. The second consequence is that we’re starting to reckon with today.
Roll on a decade-and-a-half and the Bank of England had about £895bn worth of bonds sitting on its balance sheet, bought during the various spurts of QE – a couple of spurts during the financial crisis, another in the wake of the EU referendum and more during COVID. Some of those bonds were bought at low prices but, especially during the pandemic, they were bought for far higher prices (or, since the yield on these bonds moves in opposite directions to the price, at lower yields).
Then, three years ago, the Bank began to reverse QE. That meant selling off those bonds. And while it bought many of those bonds at high prices, it has been selling them at low prices. In some cases it has been losing astounding amounts on each sale.
Take the 2061 gilt. It bought a slug of them for £101 a go, and has sold them for £28 a piece. Hence realising a staggering 73% loss.
Tot it all up and you’re talking about losses, as a result of the reversal of QE, of many billions of pounds. At this point it’s worth calibrating your sense of these big numbers. Broadly speaking, £10bn is a lot of money – equivalent to around an extra penny on income tax. The fiscal “black hole” Rachel Reeves is facing at the forthcoming budget is, depending on who you ask, maybe £20bn.
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Well, the total losses expected on the Bank of England’s Quantitative Tightening programme (“tightening” because it’s the opposite of easing) is a whopping £134bn, according to the Office for Budget Responsibility.
Now it’s worth saying first off that, as things stand at least, not all of those losses have been crystallised. But over time it is expected to lose what are, to put it lightly, staggering sums. And they are sums that are being, and will be paid, by British taxpayers in the coming years and decades.
Now, if you’re the Bank of England, you argue that the cost was justifiable given the scale of economic emergency faced in 2008 and onwards. Looking at it purely in terms of fiscal losses is to miss the point, they say, because the alternative was that the Bank didn’t intervene and the UK economy would have faced hideous levels of recession and unemployment in those periods.
However, there’s another, more subtle, critique, voiced recently by economists like Christopher Mahon at Columbia Threadneedle Investments, which is that the Bank has been imprudent in its strategy of selling off these assets. They could, he argues, have sold off these bonds less quickly. They could, for that matter, have been more careful when buying assets not to invest too wholeheartedly in a single class of asset (in this case government bonds) that might be sensitive in future to changes in interest rates.
Most obviously, there are other central banks – most notably the Federal Reserve and European Central Bank – that have refrained from actively selling the bonds in their QE portfolios. And, coincidentally or not, these other central banks have incurred far smaller losses than the Bank of England. Or at least it looks like they have – trying to calculate these things is fiendishly hard.
But there’s another consequence to all of this as well. Because if you’re selling off a load of long-dated government bonds then, all else equal, that would have the tendency to push up the yields on those bonds. And this brings us back to the big issue so many people are fixated with right now: really high gilt yields. And it so happens that the very moment Britain’s long-term gilt yields began to lurch higher than most other central banks was the moment the Bank embarked on quantitative tightening.
But (the plot thickens) that moment was also the precise moment Liz Truss’s mini-budget took place. In other words, it’s very hard to unpick precisely how much of the divergence in British borrowing costs in recent years was down to Liz Truss and how much was down to the Bank of England.
Either way, perhaps by now you see the issue. This incredibly technical and esoteric economic policy might just have had enormous consequences. All of which brings us to the Bank’s decision today. By reducing the rate at which it’s selling those bonds into the market and – equally importantly – reducing the proportion of long-dated (eg 30 year or so) bonds it’s selling, the Bank seems to be tacitly acknowledging (without actually quite acknowledging it formally) that the plan wasn’t working – and it needs to change track.
However, the extent of the change is smaller than many would have hoped for. So questions about whether the Bank’s QT strategy was an expensive mistake are likely to get louder in the coming months.
The former BT Group chief Philip Jansen is being lined up as the next chairman of Heathrow Airport as Britain’s biggest aviation hub prepares to deliver an expansion costing close to £50bn.
Sky News has learnt that Mr Jansen, who chairs the FTSE-100 marketing services group WPP, is in advanced talks with Heathrow’s board and shareholders about taking on the role.
If the discussions reach a successful conclusion, sources said an announcement could come within weeks.
Mr Jansen is said to have emerged as the frontrunner from a shortlist of candidates compiled by headhunters at Russell Reynolds Associates.
His experience as the boss of BT, a regulated utility, is said to have been key to his selection as the preferred candidate.
Mr Jansen has also run companies including MyTravel and Worldpay.
The appointment of a successor to Lord Deighton, who has held the post for nine years, comes at a critical time for Heathrow.
In August, the airport submitted a revised expansion plan consisting of a third runway costing £21bn, £12bn for a new terminal and stand capacity, and £15bn to modernise the current airport through the expansion of Terminal 2.
The existing Terminal 3 would ultimately be closed.
Read more: Full details of Heathrow’s plans for a third runway revealed
Heathrow handled a record 83.9 million passengers in 2024 and is adamant that a third runway is essential to the growth of Britain’s economy, given the volume of exports which pass through the site.
“It has never been more important or urgent to expand Heathrow,” the airport’s chief executive, Thomas Woldbye, said in August.
“We are effectively operating at capacity to the detriment of trade and connectivity.
“With a green light from government and the correct policy support underpinned by a fit for purpose regulatory model, we are ready to mobilise and start investing this year in our supply chain across the country.
“We are uniquely placed to do this for the country; it is time to clear the way for take-off.”
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The expansion remains opposed by many airlines alarmed by the prospective increase in charges to use the airport, as well
It has, however, been backed by the government, with Rachel Reeves, the chancellor, saying that a third runway “would unlock further growth, boost investment, increase exports, and make the UK more open and more connected as part of our Plan for Change”.
Heathrow’s next chairman will lead a board dominated by representatives of the airport’s principal shareholders.
Mr Woldbye apologised in May for being asleep during the power outage in March which forced Heathrow’s temporary closure.
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The airport said it would implement the recommendations of a review conducted by former transport secretary Ruth Kelly.
Heathrow’s search for a new chairman comes months after the most significant changes to its ownership structure in years.
Ardian, a French investment group, now owns 32.6% of the company following a series of transactions over the last 12 months.
Saudi Arabia’s Public Investment Fund has also become an investor.
Heathrow has never formally announced Lord Deighton’s intention to step down, other than a disclosure in its annual report in which he wrote:
“In light of the recent changes to the HAHL [Heathrow Airport Holdings Limited] board…the nominations committee…has asked me to extend my appointment for a limited period to help ensure a smooth transition whilst new non-executive shareholder directors become familiar with the business and a new chair is appointed.
“I have therefore agreed to extend my role as chair for a limited period to ensure continuity and stability on the HAHL Board during this period of transition.”
A Heathrow spokesperson declined to comment, while Mr Jansen could not be reached for comment.
Business
Major milestone in Post Office scandal as first Capture conviction referred to Court of Appeal
The first Post Office Capture conviction has now been formally referred to the Court of Appeal, marking a major milestone in the IT scandal.
The Criminal Cases Review Commission (CCRC) made the decision to refer the case of sub-postmistress Patricia Owen back in July.
Mrs Owen was convicted of theft by a jury in 1998, based on evidence from the faulty IT software Capture.
She was given a suspended prison sentence and fought to clear her name afterwards – but died in 2003.
Capture software was used in 2,500 branches between 1992 and 1999.
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The first Capture conviction was sent for appeal in July
It is the first time a conviction based on Capture – the predecessor to the Horizon system at the centre of the wider Post Office scandal – has reached the Court of Appeal.
It comes after Sky News revealed that a damning report into Capture, which could help overturn convictions, had been unearthed after nearly 30 years.
An investigation found the Post Office knew about the report at the time and continued to prosecute sub-postmasters based on Capture evidence.
Mrs Owen’s family submitted an application to the CCRC in January 2024 – her case has now been referred on the grounds that her prosecution was an “abuse of process”.
A ‘touchstone case’ for victims
Lawyers have said that if Mrs Owen is exonerated posthumously in the Court of Appeal, it may “speed up” the handling of others.
The CCRC is also continuing to investigate more than 30 other “pre-Horizon” convictions.
CCRC chair, Dame Vera Baird, also told Sky News in the summer it could be a “touchstone case” for other victims.
Juliet Shardlow, Mrs Owen’s daughter, has been fighting to clear her mother’s name for years.
She told Sky News the family were “so pleased” her case had finally been referred.
“This has been a very long journey for us as a family and we can now see the light at the end of the tunnel,” she said.
“It’s just sad that mum isn’t here to see it.
“The good news is that once mum’s case is heard in the High Court, it will pave the way for all the other Capture victims.”
The Post Office has previously said it is “determined that past wrongs are put right and continue to support the government’s work in this area as well as fully co-operate with the Criminal Cases Review Commission”.
Business
UK suffers blow in bid to become minerals superpower – as it’s snubbed by its own leading firm
Britain’s hopes of becoming a critical minerals superpower have been dealt a severe blow after one of its leading companies abandoned its plans to build a rare earths refinery near Hull.
Pensana had pledged to build a £250m refinery on the banks of the Humber, to process rare earths that would have then been used to make magnets for electric cars and wind turbines.
The plant promised to create 126 jobs and was due to receive millions of pounds of government funding.
However, Sky News has learnt that Pensana has decided to scrap the Hull plant and will instead move its refining operations to the US.
Pensana’s chairman, Paul Atherley, said the company had taken the decision after the Trump administration committed to buying rare earths from an American mine, Mountain Pass, at a guaranteed price – something no government in Europe had done.
“That’s repriced the market – and Washington is looking to do more of these deals, moving at an absolute rate of knots,” he said.
“Europe and the UK have been talking about critical minerals for ages. But when the Americans do it, they go big and hard, and make it happen. We don’t; we mostly just talk about it.”
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The decision comes at a crucial juncture in critical minerals and geopolitics. China produces roughly 90% of all finished rare earth metals – exotic elements essential for the manufacture of many technology, energy and military products.
Last week, Beijing imposed restrictions on the exports of rare earths, prompting Donald Trump to threaten further 100% tariffs on China.
Pensana had been seen as Britain’s answer to the periodic panics about the availability of rare earths. The site at Saltend Chemicals Park was chosen by the government to launch its critical minerals strategy in 2022.
Visiting for the official groundbreaking, the then business and energy secretary Kwasi Kwarteng said: “This incredible facility will be the only one of its kind in Europe and will help secure the resilience of Britain’s supplies into the future.”
He pledged a government grant to support the scheme. That grant was never received because Pensana never built its plant.
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Paul Atherley and Kwasi Kwarteng at a groundbreaking ceremony for the plant in July 2022. Pic: Pensana
Mr Atherley said he is optimistic about another project he’s involved with, to bring lithium refining to Teesside through another company, Tees Valley Lithium.
But, he said, rare earth processing is far more complex, energy-intensive and expensive, making it unviable in the UK, for the time being.
The decision is a further blow for Britain’s chemicals industry, which has faced a series of closures in recent months, including that of Vivergo, a biofuels refiner based in the same chemicals park where Pensana planned to locate its refinery.
Producers warn that Britain’s record energy costs – higher than most other leading economies – are stifling its economy and triggering an outflow of businesses.
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