Key facts
- Economists and bond investors are urging the Bank of England to cease active sales of government bonds.
- The policy is contributing to elevated UK government borrowing costs and significant taxpayer losses.
- Long-term UK government bond yields have reached levels not seen since 1998.
- The Bank of England's active quantitative tightening program contrasts with other central banks' passive approaches.
- Estimates suggest losses from the Bank of England's quantitative tightening program could reach £125 billion.
Economists and bond investors are urging the Bank of England to abandon its active bond sales strategy, arguing it is exacerbating the UK government's borrowing costs and leading to substantial taxpayer losses. The yield on the 30-year gilt has reached its highest level since 1998, with 10-year yields also near post-financial crisis highs, amid broader concerns about the UK's fiscal path and inflation.
The Bank of England's approach to unwinding its quantitative easing (QE) program, known as 'active quantitative tightening' (QT), involves selling bonds from its balance sheet. This contrasts with other major central banks that have opted to let bonds mature passively. Analysts like James Carter from W1M suggest that the UK could reduce its balance sheet without active sales, especially as the US Treasury has intervened to support yields.
Governor Andrew Bailey has defended the policy, stating it provides flexibility for future QE if necessary. However, a growing number of analysts believe the program has achieved its balance sheet reduction goals. Neil Wilson of Saxo UK noted that the Bank has already unwound £400 billion of QE-era bond buying, and Damian Pudner of the Great British Think Tank argued that QT should have concluded months ago.
Recent estimates from the Bank of England indicate that its QT program has added up to 30 basis points to long-dated bond yields. The program also places immediate responsibility on the taxpayer for losses incurred by the central bank's balance sheet reduction, with estimated losses potentially reaching £125 billion. This fiscal impact is increasingly seen as a stronger argument for slowing active QT, as selling gilts crystallizes losses immediately for the Treasury.
Analysts at Deutsche Bank predict that the Monetary Policy Committee will vote next month to reduce the pace of bond disposals to £50 billion and potentially halt active sales altogether, reflecting current market conditions.