Selling Into the Storm

This Thursday, the Bank of England's Monetary Policy Committee will almost certainly leave Bank Rate unchanged at 3.75 per cent. The more consequential decision is the one nobody is leading on: the Committee's vote on the pace of quantitative tightening. It has been rumoured that the Bank will slow QT. That would be a step in the right direction, but it does not go far enough. The Bank needs to press pause.

The Bank of England is the only major central bank still actively selling government bonds into the market, rather than simply letting its holdings mature and roll off. The Federal Reserve ended its balance-sheet runoff entirely on 1 December 2025, after roughly three and a half years of passive QT that never involved outright sales. The European Central Bank has relied on non-reinvestment of maturing bonds rather than active disposals, and moved even more cautiously than the Bank. The Bank of Canada and the Reserve Bank of Australia both opted for passive QT from the outset.

Britain, the outlier

Since the Bank stopped reinvesting maturing gilt proceeds in February 2022, its bond holdings have fallen by more than £400bn, and a third of that reduction was achieved through active sales, not maturities. No other G7 central bank has been willing to crystallise losses on its books by actively selling long-duration debt into a market that is already straining to absorb heavy government issuance. This is a choice the Bank has made, not an economic necessity, and it makes the UK an international outlier.

A global bond glut

The case for caution is not just about keeping up with peers. It is about market conditions. The world is in the grip of a synchronised, structural repricing of long-dated sovereign debt. US 30-year Treasury yields touched 5.34 per cent in August, their highest since before the 2008 financial crisis, prompting the US Treasury to intervene with expanded buybacks of longer bonds. German 10-year yields have hit levels last seen in 2011, French borrowing costs are at their highest since 2008, and Japanese 10-year yields have pushed above 3 per cent for the first time in three decades. Heavy government issuance across major economies, competition from a wave of corporate debt, and stubborn inflation concerns have produced a global bond glut in which supply has outstripped demand.

Britain has fared worse

Britain has not been spared. If anything, it has fared worse. The 30-year gilt yield reached 5.94 per cent on 15 September, its highest since March 1998, while the 10-year climbed to around 5.38 per cent, a level last seen during the 2008 crisis. A 30-year gilt auction this year priced at 5.8168 per cent, the highest borrowing cost recorded at a UK auction or syndication since comparable records began in 1998. In other words, the Bank is choosing to add its own supply to precisely the segment of the market, long-duration and highly fiscally sensitive, that is under the most global stress.

Even the Bank's own analysis concedes the point. Officials estimate QT has added 20 to 30 basis points to the roughly 200-basis-point rise in gilt term premia since 2022, a larger effect than they had previously acknowledged, while Deputy Governor Dave Ramsden has separately pointed to a cumulative 25-basis-point impact.

A policy designed to be passive and unobtrusive has become anything but, at exactly the moment the market can least absorb it.

The Chancellor's shrinking headroom

The new Chancellor, John Healey, may be claiming ignorance of the state of the public finances before he took the role, but he now heads into next month's Budget with materially less fiscal headroom than Rachel Reeves had in the spring, in large part because higher gilt yields are eating into the buffer around the fiscal rules.

The government is largely to blame. It has been issuing near-record volumes of new debt this fiscal year to fund its spending, and it is one reason the UK has become the whipping boy for the bond vigilantes: investors do not believe the government has the willingness or the ability to cut public spending or push through the supply-side reforms that would boost growth and lower the debt-to-GDP ratio. Every additional billion of gilts the Bank sells on top of that issuance is competing for the same shrinking pool of willing buyers, at the same moment those buyers are demanding a bigger premium for duration risk. The government has spooked the bond markets, and the Bank is making matters worse.

“In the background” no longer

The Bank's long-standing defence of QT is that it is not meant to be an active lever of monetary policy. Bank Rate is supposed to do that work, while QT operates quietly “in the background,” in Ramsden's words. That might have made sense a few years ago, when term premia were stable and the Bank was normalising a genuinely oversized balance sheet built up over a decade of quantitative easing. It makes much less sense today, when the Bank's own research shows QT has become a measurable, non-trivial driver of the very yields that are complicating fiscal policy and squeezing mortgage borrowers.

Pausing is not a panacea

To be clear, pausing QT would not be a panacea. The Bank's own analysis suggests the bulk of any slowdown in the QT envelope reflects fewer bonds maturing rather than a retreat from active selling. Global forces, from US fiscal deficits to Middle East-driven oil prices to Japanese and German yield dynamics, will keep pushing up long yields regardless of what the MPC decides this week. And investors will be watching John Healey's Budget closely to see whether he sets out a credible plan to cut public spending and drive growth.

Pausing is still worth doing. The Bank has already trimmed its long-end auction calendar, running no sales above 20 years in its recent schedule, a tacit admission that selling into that segment is unwise. The logical next step is to extend that caution across the whole active-sales programme, not just its longest maturities.

Every other major central bank has concluded that letting a bond portfolio run off passively is enough to normalise its balance sheet without adding fuel to a fragile market. The Bank of England has chosen a more aggressive path for over three years, and it is now selling into a global bond glut. Its actions are actively constraining Britain's fiscal room for manoeuvre. A cut to the QT envelope is welcome but insufficient. Given the scale of the problem, and the Bank's own admission that QT is adding materially to gilt yields, the prudent course this week is to pause active sales altogether, at least until the current bout of market stress subsides.

This should not be seen as Bailey bailing out the government. The Budget next month will be key, and the Chancellor must cut public spending and set out exactly how he intends to drive growth. Andy Burnham, too, needs to impose some political discipline on his own MPs to push through the necessary reforms. That is how borrowing costs come down and the risk of an uncovered gilt auction is averted. But the Bank of England must also play its part, by pressing pause on QT.