The Bank of England’s decision to hold interest rates at 4% this week was widely expected. With inflation still running at 3.8% in the year to August – nearly double the Bank’s 2% target – policymakers were under pressure to signal caution after July’s controversial rate cut.
Yet despite the pause, long-term government borrowing costs continue to climb. The yield on 30-year gilts rose to 5.56% by the end of last week – higher than before the Monetary Policy Committee (MPC) announced its latest decision.
That reaction reflects not only unease about the economic outlook but also growing concern over the Bank’s quantitative tightening (QT) programme, a policy that has become a flashpoint between Threadneedle Street, the Treasury, and increasingly vocal critics across the political spectrum.
The Row Over Quantitative Tightening
Alongside its rate decision, the Bank said it would slow the pace of QT – the reversal of the vast quantitative easing (QE) programme launched during the 2008 financial crisis and expanded during the pandemic.
Under QE, the Bank created money to buy government bonds, helping to keep borrowing costs down. By 2021, its gilt holdings had reached £875bn, equivalent to 37% of government debt.
Since 2022, however, the Bank has been selling those bonds back into the market – around £100bn a year – just as the government is issuing new debt. Critics argue this double pressure has forced gilt prices down and pushed yields, and therefore borrowing costs, sharply higher.
The scale of the losses is already significant. Because the Bank bought gilts when prices were high and is selling when prices are low, taxpayers are footing the bill. Since 2022, QT has generated £45bn in losses, with the Office for Budget Responsibility (OBR) forecasting an overall cost of £134bn by the end of this parliament – more than the UK’s annual education budget.
Political and Economic Pressure
The Bank insists QE saved the government money over the long term, while profits from earlier bond purchases were passed to the Treasury. But critics say those arguments are wearing thin as QT losses mount.
John Redwood, the Conservative MP who raised concerns about QT several years ago, has been joined by a wide coalition of sceptics – from Labour MPs calling for more spending flexibility to former Bank insiders worried about financial stability.
Richard Tice, deputy leader of Reform UK, has written to Governor Andrew Bailey demanding QT be scrapped. He is due to meet Bailey this week. “QT has been a disastrous decision, imposing tens of billions of losses on taxpayers and increasing government borrowing costs, with no democratic mandate,” Tice said.
The Bank has since pledged to scale back QT from £100bn to £70bn a year. But close reading of the plan shows active gilt sales will actually rise to £20bn over the next 12 months, up from £13bn last year. Analysts say that may explain why gilt yields jumped again after Thursday’s announcement.
A Growing Risk for the Government
The political stakes are high. Chancellor Rachel Reeves faces an £83.8bn borrowing bill in the first five months of the financial year – £16bn more than last year and well above OBR forecasts. With November’s Budget approaching, she must balance her fiscal rules with demands for more spending.
Higher yields mean higher debt servicing costs, squeezing public finances further. Of the £18bn borrowed in August alone, £8.4bn went on interest payments.
Analysts warn that unless the Bank reassesses QT, Britain risks a fiscal squeeze just as growth falters. Columbia Threadneedle estimates UK QT losses could ultimately reach 5.4% of GDP – far higher than in the eurozone or US, where central banks are holding bonds to maturity rather than actively selling them.
The Crescendo
For Governor Bailey, the debate over QT is reaching a crescendo. The Bank argues it must normalise policy after years of emergency stimulus. But with markets jittery, borrowing costs climbing, and politicians restless, critics say QT is worsening the very problems it was meant to solve.
How the Bank navigates this row could shape not only the November Budget but also the government’s wider economic credibility. For now, one thing is clear: the politics of bond selling have become as important as the economics.
