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2025-09-18 18:06:13
The Bank of England faces a difficult decision: the struggle between quantitative tightening and fiscal distress. (1) The Bank of England's independence is being tested, as its continued active sales of government bonds (quantitative tightening) are exacerbating the UK government's debt burden. Although the Bank of England's latest Monetary Policy Report estimates that over £300 billion of quantitative tightening over three years has only increased government borrowing costs by 0.15% to 0.25%, many analysts believe the bank underestimates the actual impact. (2) Statistics show that the yield on UK 30-year government bonds has risen to its highest level since the 1990s this year. Faced with a funding gap of approximately £20 billion at the Treasury, market concerns are growing that the government will implement more tax increases or spending cuts in November, further pushing up long-term borrowing costs. (3) Institutional forecasts indicate that the Bank of England may announce a slowdown in its quantitative tightening program at its meeting on Thursday, reducing its annual balance sheet reduction target from £100 billion per year over the previous two years to £67 billion, while retaining some active bond sales. ⑷ Some institutional strategists point out that even if the target is reduced, the Bank of England will still need to sell approximately £33 billion of government bonds over the next year if it does not cease active bond sales. They suggest that sales should avoid the long end of the curve to avoid impacting the fragile long-term bond market. ⑸ Although the Bank of England may believe that the impact of its bond sales is limited and aimed at reserving room for future crisis response, some external studies suggest that the cost of quantitative tightening to British taxpayers could be as high as £60 billion, more than three times its own estimate. Continued bond sales could trigger a market crisis, forcing the Bank to intervene again, creating a self-defeating cycle. ⑹ Analysts believe that if the Bank of England continues to actively sell bonds, it may be due to concerns about compromising its independence, but such a decision could lead to the Bank of England having to intervene again in the future.
