Bank of England Bond Selling Faces Growing Pressure
Bank of England bond selling is facing renewed scrutiny as economists and investors urge policymakers to slow or even halt parts of the programme to reduce pressure on Britain’s already high borrowing costs.
The Bank has been reducing the giant portfolio of government bonds it accumulated under quantitative easing, or QE, after the global financial crisis and during later economic emergencies.
That reversal is known as quantitative tightening (QT).
However, critics argue that selling bonds back into the market at a time when investors are already demanding higher returns on government debt risks adding further upward pressure to gilt yields.
The debate has become particularly important because Britain is dealing with elevated borrowing costs at the same time as the government faces difficult decisions over spending, taxation and debt.
The Bank of England’s own figures indicate that the stock of assets bought under QE is expected to have fallen to about £488 billion by September 2026.
Now, with another bank decision approaching, the big question is whether policymakers should continue shrinking that portfolio at the current pace.
What Is Quantitative Tightening?
To understand the controversy, it helps to know what the bank is actually doing.
During periods of economic crisis, the Bank of England created money electronically and used it to purchase large quantities of government bonds.
This process — quantitative easing — aimed to lower borrowing costs, support financial markets and encourage economic activity.
At its peak, the Bank held hundreds of billions of pounds’ worth of gilts.
In February 2022, it stopped reinvesting money from bonds reaching maturity. Later that year, it began actively selling some of those bonds back into the market.
This process works in the opposite direction to QE.
Instead of increasing its bond holdings, the bank gradually reduces them.
The Bank says shrinking its balance sheet allows it more flexibility to use QE again during a future financial or economic crisis.
Why Could Bond Selling Increase Borrowing Costs?
Bond prices and yields move in opposite directions.
When the price investors are willing to pay for government bonds falls, the yield rises.
That yield effectively represents the return investors demand for lending money to the government.
If large quantities of bonds are being sold into the market, the additional supply can put downward pressure on prices and therefore upward pressure on yields.
The Bank argues that the overall effect of QT has been relatively modest and says its auctions have not disrupted the functioning of the gilt market.
However, its analysis acknowledges that QT has produced a small increase in long-term interest rates.
Some economists believe the effect could become more significant when markets are already under stress.
Research highlighted by University of Liverpool economist Costas Milas suggested QT could add as much as 0.4 percentage points to UK yields, although it may simultaneously help reduce inflation.
That illustrates the difficult trade-off facing policymakers.
Stopping QT could ease some pressure on borrowing costs, but it is also part of the Bank’s broader effort to normalise monetary policy after years of extraordinary stimulus.
UK Gilt Yields Have Risen Sharply
The argument has become more urgent because government bond markets have experienced another major sell-off.
On 15 September, Britain’s 10-year gilt yield climbed to around 5.4%, its highest level since 2007, while the 30-year yield approached 6%.
The problem is not unique to Britain.
Government borrowing costs have risen across several major economies amid concerns about inflation, high levels of public debt and geopolitical uncertainty. The US 10-year Treasury yield has also moved above 5%.
However, high gilt yields create a particularly uncomfortable problem for the UK government.
Higher yields eventually mean the Treasury must pay more when issuing or refinancing debt.
That can increase debt-interest spending and leave the government with less money available for public services, investment or tax reductions.
Could the Bank Stop Selling Long-Term Gilts?
There are already signs that the bank could change its approach.
The Bank is expected to halt active sales of 20- and 30-year government bonds, according to reporting ahead of Thursday’s policy announcement.
It could also reduce the overall pace at which its gilt holdings are shrinking.
Investors had already been expecting the bank to slow quantitative tightening.
A July survey cited by Reuters indicated expectations that the annual reduction in the bond portfolio could fall from the current £70 billion to approximately £50 billion over the 12 months to September 2027.
Long-dated bonds are particularly sensitive because demand for them has changed significantly.
Traditionally, pension funds have been major buyers of long-term UK government debt. Structural changes in the pension industry have weakened some of that demand, which has made the market more vulnerable to additional long-term bond supply.
Stopping active sales at the long end could therefore reduce one source of pressure without ending quantitative tightening completely.
Why Would Lower Gilt Yields Help the Government?
Reducing government borrowing costs could potentially save the Treasury billions of pounds over time.
The government borrows by issuing gilts.
When yields are high, new borrowing becomes pricier. As existing bonds mature and need refinancing, higher rates gradually increase the government’s overall debt-interest bill.
Reuters reports that ending sales of longer-dated gilts could potentially save the government about £2.5 billion annually by the end of the decade, according to estimates cited in reporting on the expected change.
Even relatively small movements in borrowing costs can become significant when applied across Britain’s enormous stock of government debt.
This is why bond-market movements matter far beyond financial trading desks.
Money spent servicing debt cannot be spent simultaneously on hospitals, schools, defence, infrastructure or other government priorities.
The Bank Has Already Taken Large Losses on QE
There is another controversial part of the story: losses associated with the QE programme.
The bank bought many bonds when interest rates were extremely low and bond prices were high.
Interest rates subsequently rose sharply.
As a result, bonds sold under QT can be worth considerably less than the price originally paid for them.
Under arrangements established when QE was introduced, the programme ultimately transfers gains and losses between the Bank and the Treasury.
Critics therefore argue that actively selling bonds at losses unnecessarily increases costs to taxpayers.
Estimates cited in the current debate suggest cumulative losses could reach about £120 billion if prevailing interest-rate conditions continue, although the eventual figure is highly uncertain and depends on future market conditions.
Supporters of the Bank’s approach counter that we should not judge QE and QT simply by accounting profits or losses. QE was introduced to stabilise the economy and meet monetary-policy objectives, not to generate financial returns for the government.
Why Doesn’t the Bank Simply Stop Quantitative Tightening?
It sounds simple: if selling bonds is pushing borrowing costs higher, stop selling them.
But monetary policy rarely offers a free lunch.
QT helps reverse some of the extraordinary monetary stimulus introduced during previous crises.
The Bank also argues that reducing its balance sheet creates room to expand it again if another severe economic shock requires fresh intervention.
There is also the question of inflation.
Higher yields tighten financial conditions, making borrowing pricier for households and businesses. That can reduce demand in the economy and therefore help control inflation.
Research suggests QT may have helped reduce inflation even while putting some upward pressure on gilt yields.
Ending it completely could therefore loosen financial conditions at precisely the moment when policymakers remain worried about renewed inflation pressures.
What Does It Mean for Mortgages?
Government bond yields do not translate directly into mortgage rates, but they influence borrowing conditions throughout the economy.
Swap rates, gilt yields and expectations about future Bank Rate all affect how lenders price mortgages.
If government borrowing costs remain persistently high, financing conditions for banks and businesses can also remain expensive.
A meaningful fall in gilt yields could therefore eventually contribute to improved borrowing conditions.
However, households should not expect mortgage rates to suddenly plunge simply because the bank reduces bond sales.
The bank rate remains a much more important influence on short-term borrowing costs.
The bank’s next interest rate decision is due on 17 September 2026.
Andrew Bailey Faces a Difficult Decision
Governor Andrew Bailey and the Monetary Policy Committee now face a delicate balancing act.
Move too quickly to stop QT, and critics could argue that the Bank is helping the government finance its debt or weakening its fight against inflation.
Continue selling aggressively, and the bank risks adding pressure to an already difficult bond market.
The Bank has consistently stressed that the Bank Rate remains its primary monetary-policy tool, while QT operates in the background. It has also said bond sales should not disrupt financial-market functioning.
That gives policymakers the room to change the speed or composition of QT without necessarily abandoning the programme.
What Happens Next?
Attention will now turn to Thursday, 17 September, when the Bank is scheduled to announce its next monetary-policy decision and its approach to the next phase of quantitative tightening.
One possibility is a compromise.
Rather than ending QT altogether, the Bank could reduce the annual target and stop actively selling the longest-dated gilts.
That would allow bonds already reaching maturity to continue naturally shrinking the portfolio while reducing the amount of additional debt being actively pushed into the market.
Such an approach could ease pressure on gilt yields without representing a complete reversal of the bank’s strategy.
Conclusion
The debate over Bank of England bond selling has become increasingly important as Britain’s borrowing costs climb.
Quantitative tightening was designed to unwind the extraordinary support introduced through QE and restore flexibility to the bank’s balance sheet. But critics increasingly question whether aggressively selling government bonds makes sense when the gilt market is already under pressure.
Slowing or halting some sales could potentially reduce upward pressure on yields and ultimately save the Treasury billions in borrowing costs.
But there are trade-offs. QT also tightens financial conditions and can help control inflation, while the Bank wants to preserve its independence from government borrowing decisions.
Thursday’s announcement will therefore be closely watched not only by investors but also by the government, mortgage borrowers and businesses.
