Bank of England Urged to Halt Bond Sales to Cut UK Borrowing Costs 2026

Economists are urging the Bank of England to slow or halt its bond-selling programme, known as quantitative tightening (QT), to reduce UK borrowing costs. The call comes as government borrowing costs hit multi-decade highs, with the 10-year gilt yield surpassing 5.4% and the 30-year reaching 5.93%. The Bank's QT strategy, which reverses the quantitative easing (QE) implemented after the 2008 financial crisis, has already cost the exchequer billions and is exacerbating market pressures.

What Is Quantitative Tightening and Why Does It Matter?

Quantitative tightening is the process by which central banks reduce the size of their balance sheets by selling government bonds (gilts) back into the market or allowing them to mature without reinvestment. The Bank of England embarked on QT to combat inflation after years of QE. However, selling gilts when their market value has fallen crystallises losses for the exchequer, as the government is obligated to cover the difference between the purchase price and the sale price.

Moreover, offloading gilts increases the supply of bonds in the market, which suppresses demand and pushes up yields—the interest rate the government pays on its debt. This dynamic is particularly concerning when borrowing costs are already elevated due to global factors such as Middle East tensions driving up oil prices.

The Impact on UK Borrowing Costs

The yield on UK government bonds has surged to levels not seen since the early 2000s. On Monday, the benchmark 10-year gilt yield passed 5.4%, its highest since July 2007, while the 30-year yield rose to 5.93%, the highest since March 1998. These soaring yields reflect investor concerns about fiscal sustainability and inflationary pressures.

The Bank of England estimates that its QT programme could result in total losses to the exchequer of £120bn if interest rates follow the path expected by financial markets. This staggering figure has prompted economists to argue that continuing QT at the current pace is counterproductive, especially when the government is trying to manage its finances prudently.

Arguments for Slowing or Halting QT

Critics of the Bank's aggressive QT approach point out that it is compounding the government's fiscal challenges. By selling gilts into a weak market, the Bank is effectively increasing the cost of borrowing for the government, which must issue new debt to fund public services. This creates a vicious cycle: higher yields lead to higher borrowing costs, which in turn strain public finances and potentially necessitate further borrowing.

Economists have urged the chancellor, John Healey, to press the Bank of England to reconsider its QT strategy. They argue that a more gradual approach, or even a temporary pause, could help stabilise the gilt market and reduce the interest burden on the exchequer. The Bank's monetary policy committee (MPC) meets this week to decide not only the level of interest rates but also whether to freeze or slow the sale of government bonds.

Comparing QT Approaches: Aggressive vs. Gradual

Key Takeaways

• The Bank of England's quantitative tightening has contributed to soaring UK borrowing costs.
• Selling gilts at a loss crystallises billions in losses for the exchequer.
• Increased gilt supply suppresses demand and pushes yields higher.
• Economists urge a slower pace or pause in QT to alleviate fiscal pressure.
• The MPC's decision this week is crucial for the UK's economic outlook.

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