Bank of England's Quantitative Tightening Policy Exacts Steep Price from UK Government

The Bank of England's quantitative tightening (QT) policy has led to significant losses for the UK government, with cumulative losses on active gilt sales amounting to £36bn since QT began in 2022. This is enough to pay for around half the nation's annual defence budget.

Under an indemnity, the government is required to make good any losses on the Bank's gilt sales, further adding to the government's already high debt-servicing costs. The Office for Budget Responsibility (OBR) projects further losses of £94bn in the next four years, including £22bn of crystallised losses on active gilt sales.

The Bank's balance sheet has shrunk from nearly £900bn, or around 40% of UK GDP, to around half that size under QT. However, the Bank doesn't seem to know when to stop selling gilts, despite it being a major seller and contributing to the global bond market rout.

The Treasury wonders whether the substantially self-inflicted nature of these losses is strictly necessary. The OBR projects that continued active gilt sales will add around £47bn to government debt by 2031. Markets are difficult enough, with rising inflation and unsustainable levels of government debt prompting a sharp global bond-market selloff in recent weeks.