Does the treasury borrow money from the bank of england?

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Luke Peters

Dear Her Majesty's Treasury,

Is it true that the Treasury borrows money to finance government from the Bank of England, a government-owned institution, at interest, and receives back 50% of the bank's year on year profits?

Yours faithfully,

Luke Peters

Enquiries, CEU - HMT, Her Majesty’s Treasury

Dear Mr Peters,

Thank you for your Freedom of Information request. I write to confirm receipt of your request and to let you know that it is receiving attention. If you have any enquiries regarding your request do not hesitate to contact us.

Regards

Jhenene Simpson | Correspondence & Enquiry Unit, HM Treasury, 2/W1, 1 Horse Guards Road, London, SW1A 2HQ |

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responses, FOI - HMT, Her Majesty’s Treasury

Dear Mr Peters

Please find attached response to your two FoI requests of 20^th April.

Information Rights

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responses, FOI - HMT, Her Majesty’s Treasury

1 Attachment

Mr Peters,

With apologies, please find our response correctly attached.

Regards

Nick Dippie | Information Rights Unit
HM Treasury| 2/SW, 1 Horse Guards Road, SW1A 2HQ

From: responses, FOI - HMT
Sent: 20 May 2011 11:25
To: [FOI #69382 email]
Subject: [UNCLASSIFIED] 11/341 and 11/342 FoI Response The Bank of England

Dear Mr Peters

Please find attached response to your two FoI requests of 20^th April.

Information Rights

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Luke Peters

Dear responses, FOI - HMT,

Thank you for your reply. YOu only responded to one of my questions however and you beg another question.

I will reiterate the unanswered one:

Does the government/treasury borrow from the BoE to finance government and is it charged interest on the amount it borrows?

New question:

If 50% of the bank's profits are diverted to the treasury each year, what becomes of the other 50% of its profits?

Yours sincerely,

Luke Peters

Luke Peters

Dear Her Majesty’s Treasury,

I have not had an acknowledgement nor a response for my latest message. Are you going to reply?

Yours faithfully,

Luke Peters

responses, FOI - HMT, Her Majesty’s Treasury

Dear Mr Peters

With apologies for the delay in replying to you.

The Government does not borrow from the Bank of England to finance the
fiscal deficit. Government borrowing from the central bank is illegal
under the Maastricht Treaty. In addition, doing so would conflict with the
UK's monetary policy framework. The framework gives the Monetary Policy
Committee (MPC) of the Bank of England full operational independence over
monetary policy and an inflation target of 2 per cent as measured by the
12-month increase in the Consumer Prices Index (CPI).

The majority of the Government's borrowing is financed through the
issuance of UK government bonds known as "gilts", which are marketable
sterling denominated bonds sold by the UK Debt Management Office (DMO) on
behalf of the UK Government. The DMO also issues Treasury bills, which are
zero-coupon instruments with maturities of up to a year. Zero-coupon
instruments do not make periodic interest payments but are sold at a
discount value so that investors make a return when they are redeemed.
More information about gilts and Treasury bills can be found on the DMO's
website ([1]www.dmo.gov.uk).

The Bank of England's purchases of private sector assets including gilts
via the secondary market under the programme of quantitative easing, are
not being undertaken to meet the Government's borrowing requirements.
Instead they provide the MPC with an additional tool to lower interest
rates to support nominal demand in order to meet the inflation target in
the medium term.

You asked what becomes of the 50% of post-tax profits that the Bank
retains under the Bank of England Act 1998. The Bank retains it as a
reserve against potential future losses.

We have not treated your follow up as a request under the Freedom of
Information act, as it does not constitute a request for recorded
information. However, I hope that the answers above have helped clarify
matters.

Information Rights
HM Treasury, 1 Horse Guards Road, SW1A 2HQ

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Luke Peters

Dear responses, FOI - HMT,

Many thanks for your informative response.

Yours sincerely,

Luke Peters

TheSB left an annotation ()

Interesting answer. So to recap, the government issues bonds and FRNs in order to borrow capital because it cant directly borrow from the BoE. The BoE buy the bonds off the original lender via QE and are now the holder of the bonds. So the government now owes the BoE for the coupon (so we have indirectly borrowed from the bank).

So, never mind the base rate interest, is the UK Government still paying the bond yield (on the borrowings which the BoE now own) to the Bank of England?

I wouldn't be surprised if the debt is just wiped out if they can't inflate it away. As we currently stand the Government owe the Government cash but its recorded as debt that we all, as tax payers, need to pay off, apparently

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