Is the Bank of England the most profitable company in the world?

Well the answer is probably no.  Exxon Mobil for example made $19 bn last year, and its profits were over $40 bn in 2007.  We can also debate whether the Bank of England is a company anyway (it says so on the bank notes, but it was nationalised in 1946).

However, with gilt yields continuing their march downward we thought it would be interesting to put an estimate on the returns the Bank of England has generated in the 2 1/2 years following the start of Quantitative Easing (QE). In my back of an envelope analysis I’ve calculated that the Bank is currently sitting on a profit in the region of £32 bn. On an initial outlay of £198 bn, this represents a return of about 16% (roughly 40/60 split between capital gain and income).  On an initial outlay of £198 bn of freshly printed fivers (costs = paper, ink) the return is even better of course.  The highest yield that the Bank bought gilts at was 4.62% on 17 July 2009 (some 4.75% 2030s).  That was a price of 101.79, compared with 119.53 today.

Clearly the caveat here is that if the bank actually tried to realise this profit I’m pretty sure that 10yr Gilt yields would be significantly higher than 2.3%, where they stood this morning.  With more poor UK data out this morning (PMI Services survey only just above the magic 50 mark), the market’s rally today can be at least partly explained by expectations of more QE – there’s an MPC meeting on Thursday, but most expect any announcement to come with the publication of the Inflation Report in November (the usual forum for big policy changes).  Whether gilt purchases are an efficient means of monetary stimulus or not is something we can save for another blog…

Discuss Article

  1. Justin Pugsley says:

    Those profits could very quickly turn into huge losses if investors lost confidence in the Gilts market for some reason. Ditto a big fall in US Treasuries, if that happened, it would probably also drag down gilts regardless of the UK situation. 

    And let’s face it one day gilts will fall in value! It could be a case of paper profits becoming very real losses, especially as the article says those profits can’t be cashed probably for a long time.

    Alternatively, I guess the BOE could hold them until maturity, but that would be their least favourite option I suspect. 

    Posted on: 05/09/11 | 2:34 pm

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