The Bank of England is facing mounting pressure from top economists and financial institutions to dramatically slow its programme of selling government bonds back to markets, as Britain's borrowing costs surge to unprecedented levels.
New analysis reveals that the central bank's aggressive quantitative tightening (QT) strategy is adding approximately £25 billion to government borrowing costs over the current parliamentary term. This comes at a time when the UK's debt interest payments have already reached record highs, creating a perfect storm for public finances.
Mounting Concerns Over Market Stability
Senior figures from major City institutions and academic economists have issued stark warnings about the current pace of bond sales. They argue that continuing at this rate could potentially destabilise financial markets and unnecessarily increase the tax burden on British households.
The concerns centre around the Bank's ongoing effort to unwind its massive £875 billion quantitative easing programme, accumulated during the 2008 financial crisis and COVID-19 pandemic. While most agree that some tightening is necessary, the speed and scale of current operations have raised alarm bells across the financial sector.
The £25 Billion Question
Research conducted by leading economic experts demonstrates how the Bank's current approach is directly contributing to higher government borrowing costs. By flooding the market with gilts, the Bank is effectively pushing down their prices and driving up yields, which in turn increases the interest rate the government must pay on new debt.
This additional financial pressure comes at a particularly sensitive time, with public debt hovering near 100% of GDP and the government facing numerous spending demands across public services.
A Call for Strategic Rethink
Financial experts are not calling for an abandonment of QT altogether, but rather a more measured and strategic approach. Suggestions include:
- Slowing the pace of bond sales to better align with market absorption capacity
- Allowing more bonds to mature naturally rather than actively selling them
- Implementing a more flexible approach that responds to market conditions
- Coordinating more closely with the Debt Management Office to time sales optimally
The Bank of England finds itself in a delicate balancing act. While it needs to reduce its bloated balance sheet, it must do so without triggering market turmoil or exacerbating the government's debt problems. With borrowing costs already at record levels, the margin for error has never been slimmer.
