Economists press UK chancellor to halt Bank of England's bond-selling

UK 30-year gilt yield hits 5.93%, highest since March 1998

The Bank of England’s monetary policy committee convenes this week against a backdrop of multi-decade highs in UK government borrowing costs, with economists publicly pressing Chancellor John Healey to intervene in the Bank’s bond-selling programme before his first budget next month.

The Bank has been unwinding the portfolio of government bonds — known as gilts — it purchased during the post-2008 financial crisis rescue, a process known as “quantitative tightening” (QT) that reverses the earlier quantitative easing (QE). The bonds, purchased at higher prices, are now worth less. Selling them crystallises losses for the exchequer while adding to the supply of debt in the market, which suppresses demand and pushes up yields.

On Monday the benchmark 10-year UK gilt yield passed 5.4%, its highest level since July 2007, and the 30-year yield rose to 5.93%, a level last seen in March 1998. The cost of government borrowing is at multi-decade highs amid financial-market turmoil linked to the Middle East conflict and rising oil prices.

In August the Bank estimated its QT stance could result in total losses to the exchequer of £120bn if interest rates remain on the path expected by financial markets. The Office for Budget Responsibility, the Treasury’s independent forecaster, estimates the Bank’s bond sales will add about £47bn to government debt by 2031, assuming active gilt sales of £32bn a year.

Christopher Mahon, a senior fund manager at Columbia Threadneedle Investments and a visiting fellow at the Open University Business School, said rising costs showed the Bank “should scrap active sales outright.” Mahon said the Bank’s methods had proved to be twice as expensive as the European Central Bank’s and four times as expensive as the US Federal Reserve programme, mainly because of the type of bonds the Bank bought, which have collapsed in value since 2008.

The Federal Reserve stopped actively selling its portfolio of bonds last year. Since active sales of QE bonds began in late 2022, the Bank has overseen one of the fastest reductions in central bank bond holdings among advanced economies, cutting the portfolio from a peak of £875bn to under £490bn. A year ago the Bank cut its annual target for sales from £100bn to £70bn; the target is expected to be lowered again this week, to £50bn.

Bank of England Governor Andrew Bailey has defended the policy, telling parliament’s Treasury committee earlier this year that it was not in the MPC’s remit to limit costs to the government in the short-term. Bank officials have signalled that bond sales will continue, though at a slower rate than expected earlier in the year.

Charlie Bean, a former deputy governor of the Bank of England, said: “I do not think it is politically sustainable for the MPC to be able to take such decisions without the involvement of the [Treasury] or else somehow reduce the magnitude of spillovers [to the Treasury].”

John Llewellyn, a partner at the consultancy Independent Economics and a former chief economist of the OECD, said the idea that there was a firewall between the Treasury and the central bank was a “fiction” and that Bailey should expect to negotiate with the chancellor to minimise costs.

The Guardian reports that Healey has rejected calls from inside the cabinet to take a hard line with the Bank when issuing its new remit, preferring to accept assurances that it will be mindful of extra losses to the Treasury. Louise Haigh, the Cabinet Office chief who managed Andy Burnham’s campaign to be an MP, has previously pledged to stop Bailey from “pursuing policies that actively damage the government’s balance sheet.”

The Treasury and the Bank of England declined to comment.