LONDON — Conservative MPs are urging the British government to end a system which puts taxpayers on the hook for losses incurred by the Bank of England as it unwinds a decade of massive money-printing.

In a report to be published Monday, the MPs will urge the Chancellor of the Exchequer to rip up a 14-year old agreement between the Bank and the Treasury, under which the government indemnifies the Bank for any losses incurred in its bond-buying operations.

The report, from the Conservative Way Forward group that campaigns for a smaller state and lower taxes, is the latest attack on an institution that some feel has thwarted government efforts to stimulate and support an economy struggling to overcome the shocks of recent years.

It's also consistent with broadsides from former PM Liz Truss, who has explicitly blamed the Bank for sabotaging her ill-fated premiership in 2022.

The report argues that the Bank has made a mistake unique among developed nations in trying too aggressively to reverse the decade of bond-buying that followed the global financial crisis in 2008.

It argues that this compounds the policy errors of 2021, when the Bank was slow to respond to the emerging threat of inflation. All told, the report identifies what it calls a “Bank of England surcharge” that will cost the average household over £5,500 between 2022 and the end of next year.

All major advanced economy central banks with the exception of Japan are currently trying to reduce the size of their balance sheets, fearful that the excess liquidity created by quantitative easing will create long-lasting inflation. However, the Bank of England is alone in actively selling down its bond holdings, rather than simply waiting for them to mature. As market interest rates are currently higher than when the Bank bought the bonds, it is crystallizing substantial losses on the active sales (bond prices move inversely to market interest rates).

“Controlling inflation is the Bank of England’s central goal – the entire reason for its existence,” CWF chief executive Ed Barker said in a statement released ahead of the report. “All central banks have missed their 2 percent inflation targets, but the Bank of England has missed by much, much more.”

The statement is co-signed by Tory luminaries Iain Duncan Smith, Jacob Rees-Mogg, Greg Smith, Gavin Williamson and 40 others, including Treasury Select Committee members Danny Kruger and Anne Marie Morris and five MPs who chose to withhold their names from the release.

Performing as designed

Bank officials have repeatedly pointed out that the Asset Purchase Facility, as it is known, was designed in such a way that it would generate positive cash flows for the Treasury in the short run that would be offset as the APF portfolio matured.

With this in mind, the Treasury has been using that money to pay down public debt since 2012.

Chancellor Jeremy Hunt. | Rob Pinney/Getty Images

The APF portfolio still stood at nearly £730 billion at the end of the first quarter. By the time it runs off entirely in 2035, the Bank's estimate is that it will have generated total negative cash flows of just over £`120 billion. That liability meant that Chancellor Jeremy Hunt could not afford to cut taxes significantly in his last budget before the election without breaking his promise to bring public debt down over a five-year horizon.

The MPs urged Hunt to launch “a Treasury-led review into the fiscal costs and implications of the Bank of England’s QT program, its mandate and independence” and to “consider what steps can be taken to extract HMT from these systemic indemnity payments.”

“This year alone the unelected Monetary Policy Committee plans to spend £40 billion without any consideration of the costs or value for money for taxpayers,” the MPs said.  “Our constituents would rather see this money spent on public services and we note, for example, that this is the cost of tackling the NHS waiting list backlog.”

The Bank has downplayed the importance of the active sales from the APF portfolio, saying that they have taken place “in the background” of the policy landscape, and have had only a marginal effect on tightening financial conditions for the U.K. economy.

Pressed on the issue by Kruger in an appearance before the House of Commons Treasury Committee last week. former Federal Reserve Chair Ben Bernanke stressed that quantitative easing and its unwinding “create financial risks both ways” but that management of that risk was largely an accounting issue.

If the government were to end the indemnity, it would force the Bank to recognize the loss on its own balance sheet instead. Other central banks such as the Fed and European Central Bank have dealt with this issue by using accounting techniques to spread the impact of losses out over a number of years, trusting that they will earn enough from their usual operations over time to repair their balance sheets.