The Bank of England faces mounting pressure to slow or halt its bond-selling program, with economists and officials warning the policy is inflating UK borrowing costs and costing the exchequer billions. The Monetary Policy Committee (MPC) is set to decide this week on the pace of quantitative tightening (QT), as gilt yields hit multi-decade highs and fiscal pressures mount.
The Bank of England’s quantitative tightening (QT) program has drawn sharp criticism from economists and policymakers, who argue it is exacerbating the UK’s fiscal challenges by driving up government borrowing costs. With the Monetary Policy Committee (MPC) set to meet this week, the debate over the central bank’s approach to unwinding its £875bn portfolio of government bonds has intensified, as officials grapple with the financial and political fallout.
A Fiscal Crisis Unfolding
The Bank’s bond sales have already triggered £120bn in estimated losses to the exchequer, with the Office for Budget Responsibility (OBR) projecting an additional £47bn in debt by 2031 if the current pace continues. The fiscal strain is compounded by soaring gilt yields, which hit 5.4% for 10-year bonds—the highest since July 2007—and 5.93% for 30-year gilts, the highest since March 1998. These rates, driven by the Middle East conflict and global market turmoil, have pushed borrowing costs to multi-decade highs, raising concerns about the sustainability of the UK’s public finances.
Since active sales began in late 2022, the Bank has slashed its bond holdings from a peak of £875bn to under £490bn, a reduction of nearly half. However, the pace of sales has drawn fire for its fiscal impact. A year ago, the Bank cut its annual target from £100bn to £70bn, and is expected to lower it further to £50bn this week. Despite this, critics argue the approach is unnecessarily costly compared to the US Federal Reserve and European Central Bank (ECB), which have opted to let bonds mature rather than actively sell them.
Experts Warn of Political and Financial Risks
Christopher Mahon of Columbia Threadneedle Investments noted that its methods have proven twice as expensive as the ECB’s and four times as costly as the Fed’s. The Bank’s approach, he argued, has been exacerbated by the type of bonds it purchased during quantitative easing (QE), which have lost significant value since 2008. The balance sheet can continue shrinking without actively selling bonds into the market,
said James Carter of W1M, highlighting an alternative path that could mitigate fiscal damage.
A Clash of Approaches
The Bank’s defenders, including Governor Andrew Bailey, have maintained that active QT is necessary to shrink its balance sheet more quickly, given the UK’s higher proportion of long-dated gilts. However, analysts say this justification is weakening as the Bank’s portfolio nears 2022 levels. Neil Wilson of Saxo UK called the case for continued active sales “rather weak,” noting that the Bank has already unwound £400bn of QE-era bonds and is approaching balance sheet level of 2022.
Damian Pudner accused the Bank of being behind the curve yet again,
while the Bank itself has acknowledged that QT has added 30 basis points to long-term yields. The MPC’s latest Monetary Policy Report estimated that the program has contributed to a modest increase in long-term interest rates,
a concession that underscores the growing unease over its fiscal implications.
The Road Ahead
With the upcoming MPC meeting, the pressure on the Bank to slow or halt its bond sales is likely to intensify. Economists and policymakers are calling for a shift in strategy, with some advocating for an end to active sales altogether. The Bank’s current plan to reduce annual sales to £50bn this week may not be enough to quell the backlash, particularly as the Treasury prepares for its first budget under Chancellor John Healey.
The debate reflects a broader tension between monetary and fiscal policy, with critics arguing that the Bank’s actions are undermining the Treasury’s ability to manage public finances. As the MPC prepares to make its decision, the outcome could have far-reaching implications for the UK’s economic trajectory, with the stakes higher than ever for both the central bank and the government.