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Last year, the National Institute of Economic and Social
Research (NIESR) warned of the risk that profits made by the
Bank of England on its bond-buying stimulus programme could turn
to losses when borrowing costs rose.
When investors sold gilts to the BoE, they received newly
created BoE money, which pays interest at the BoE's main
interest rate.
Last year NIESR urged the government to convert these investors'
reserves into new short- and medium-dated fixed-interest
securities to insure against the cost of rising short-term
rates.
NIESR said on Friday that the cost now stood at around 11
billion pounds after the BoE raised its benchmark rate to 1.0%
from 0.1% between December and May and it warned of a bigger hit
if, as expected, rates rise further in the coming months.
"Our calculations illustrate the importance of management of
government debt," NIESR Director Jagjit Chadha said.
"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 finance ministry hit back, saying NIESR's proposals would
have been "hugely damaging" to the credibility of Britain's
management of its public finances.
"Proposals such as this risk undermining the independence of the
Bank of England and forcing commercial banks to swap reserves
for gilts would be an act of financial repression," a Treasury
spokesperson said.
"The 11-billion-pound figure is based on the implausible
assumption that it would be possible to undertake action of this
scale in a single transaction."
The Financial Times, which first reported NIESR's findings, said
the estimated cost exceeded the amount that lawmakers from
Sunak's Conservative Party accuse former Labour finance minister
and prime minister Gordon Brown of losing between 2003 and 2010
by selling gold reserves at low prices.
($1 = 0.8019 pounds)
(Writing by William Schomberg; Editing by Mark Heinrich)
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