The Bank of England’s monetary policy committee revealed plans to modify its quantitative tightening operations alongside its decision to maintain interest rates at 3.75%. The adjustment involves shifting the mechanism through which the central bank reduces its holdings of government bonds, or gilts, accumulated during previous periods of quantitative easing.
Currently, the Bank has been selling gilts directly to market participants, a process that critics argue results in losses for the Treasury since sales occur at depressed prices. Concerns have also emerged regarding the potential for large-scale disposals to depress bond prices and increase borrowing costs for the government. Under the proposed new arrangement, the Bank would sell its gilt holdings directly to the Treasury’s debt management office, which would then issue new bonds to finance these purchases. This approach is intended to streamline the process and align gilt issuance with actual market demand patterns.
The Bank has already reduced its gilt stockpile from a 2022 peak of £895bn to £488bn. The monetary policy committee discussed accelerating the sales pace but determined that doing so amid volatile global bond markets posed unacceptable risks. Instead, the Bank plans to maintain a measured annual pace of £20bn in sales, combined with bonds reaching maturity. Additionally, approximately £120bn of the longest-dated bonds will be set aside to back banknote issuance.
While analysts anticipate the changes will produce only modest effects on public finances, they suggest potential marginal benefits including slightly lower borrowing costs for the government and a slower crystallization of losses on bond sales. Treasury Chancellor John Healey is expected to issue a final decision on the proposal in April, during which time the quantitative tightening programme will remain paused. The discussions between the Treasury, Bank, and debt management office regarding these modifications have reportedly been ongoing for approximately one year.
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