End quantitative tightening now
Ending active quantitative tightening is not monetary loosening. The Bank must stop adding avoidable pressure to the gilt market, writes Damian Pudner
The Bank of England’s Monetary Policy Committee meets on 18 June. It should hold Bank Rate at 3.75 per cent. But it should also go further: it should announce the end of active quantitative tightening.
It’s an easy case. The British economy is not overheating. It’s an economy running on fumes. Unemployment has risen to five per cent and is likely to move higher. Vacancies have fallen to 705,000, their lowest level in five years. There are 100,000 fewer people on payrolls in April compared with March. Regular pay growth has slowed to 3.4 per cent, with real wage growth barely positive once inflation is taken into account.
Monetary policy works with long and variable lags. Previous rate rises are still passing through the economy. Mortgage refinancing is still biting. Business borrowing costs remain elevated. Consumer confidence is weak. Forward-looking business surveys like the Purchasing Manager’s Index data, that measure the economic health of the manufacturing and services sectors, have softened. Hiring intentions are deteriorating. This is not the backdrop for more tightening.
Yet that is what active quantitative tightening is doing.
The Bank is not merely allowing gilts to mature through passive run-off. It is selling them into the market.
The cost of QE is now being felt
This makes the Bank of England an outlier. Most major central banks are relying on passive run-off of their quantitative easing-era bond portfolios. The Bank is instead asking investors to absorb heavy new Treasury issuance and extra gilt supply from Threadneedle Street at the same time. That’s a big ask in a fragile market.
Higher gilt yields are not just a City concern. They feed through into mortgage pricing, business investment, commercial property valuations and the government’s own debt-interest bill. Public revenue is already being consumed by a grotesque level of debt interest. Fiscal headroom is now, to a large extent, a function of the 10-year gilt yield, whether politicians admit it or not. That is a perilous position for any chancellor.
The bigger problem is that the cost of quantitative easing (QE) is now being realised. The Asset Purchase Facility (APF) transferred £123.9bn of cash surplus to the Treasury between 2013 and 2022. That flow has now reversed. The Office for Budget Responsibility says the Treasury has since transferred £49.4bn to cover APF losses, with the lifetime net cost now put at £104.2bn.
This was always the risk. The Bank bought long-dated gilts at historically low yields and financed them with reserves remunerated at Bank Rate. When rates were near zero, the trade looked painless. Once Bank Rate rose, the cost of those reserves exploded. Britain had, in effect, shortened the maturity of a large part of the national debt at precisely the wrong moment in order to meet an immediate crisis. That’s not to say it wasn’t the right thing to do in 2009.
Quantitative tightening isn’t the answer
Quantitative easing was treated by politicians as costless. It never was. A deferred liability is just that. Deferred. It flattered the public finances, compressed yields, disguised the true cost of borrowing and encouraged asset price inflation – and the illusion that the state could borrow without consequence. The bill is now arriving through APF losses, higher debt-interest costs and tighter financing conditions for households and firms.
The Bank cannot undo the QE era. Nor should it restart QE any time soon. That would be the wrong signal and would rightly raise questions about inflation credibility. The correct course is narrower and more defensible: hold Bank Rate, end active gilt sales and allow the balance sheet to shrink only through passive maturity run-off.
That would not solve Britain’s fiscal crisis. It would not fix productivity, planning, energy costs or public sector inefficiency. But it would stop the Bank adding avoidable pressure to a gilt market – and ultimately the taxpayer – already carrying too much of the burden.
Ending active quantitative tightening is not monetary loosening. It is the removal of an unnecessary tightening channel at a moment when the economy is visibly weakening and the fiscal position is already highly exposed.
On 18 June, the MPC should hold rates – and end active quantitative tightening.
Damian Pudner is an economist and senior research fellow at the Great British Think Tank