Quantitative tightening and its farreaching effects on UK finances and markets

The Bank of England is pressing pause on the pace of its much discussed quantitative tightening programme, an economic measure that has quietly but significantly reshaped UK public finances. This process—essentially the opposite of the quantitative easing deployed during the 2008 financial crisis—has become a central topic in conversations about government debt, inflation, and the future of monetary policy.

For more than a decade, the Bank of England was a major buyer in the government bond market, injecting liquidity and helping to keep borrowing costs low. By purchasing £895bn in assets, mostly gilts with a slice of corporate bonds, the Bank suppressed yields, supported economic activity and underwrote a period of exceptionally cheap finance. Now, the push to reverse this process by reducing the stock of bonds on its balance sheet has picked up pace. Initially, large chunks were allowed to mature without replacement, while some assets have been sold actively into the market.

The change of course follows a global surge in inflation after the pandemic, prompting central banks to raise rates and dial back QE. Over the past year, £100bn of bonds have gone off the Bank’s books, slashing the total holdings to £558bn. This year, the strategy is shifting. With fewer bonds maturing naturally, the Bank aims to increase its active sales from £13bn up to £21bn, although the overall reduction target dips to £70bn instead of £100bn.

The financial markets have felt the tremors. Where once the Bank’s purchases lowered yields, its bond sales now risk pushing them higher, as greater supply forces down prices. Higher yields mean larger government borrowing costs—a challenge compounded by broader macroeconomic worries and the sustainability of public debt levels. The UK has recently seen long-term borrowing costs touch heights not witnessed in nearly three decades, with the Bank noting that a mix of global forces and its own quantitative tightening are drivers of the trend.

For government finances, the repercussions are multifaceted. The increased cost of servicing national debt is just the beginning. The Bank is now offloading bonds at lower prices than it paid for them, crystallising losses with every sale. At the same time, the economics of holding these bonds have flipped: the Bank is paying more interest to commercial banks (via central bank reserves created by QE) than it earns from its asset portfolio. The burden for these deficits falls directly on the Treasury, reversing years where profits from QE propped up the public purse. Official forecasts suggest that over the next five years, combined interest and valuation losses could reach £108bn, nearly erasing the £124bn gain realised since QE began.

As the dust settles on the latest policy recalibration, the implications of quantitative tightening remain at the forefront of debate—not just for Whitehall and the City, but for households across the country that rely on the health of the UK economy.