Economists and bond investors are urging the Bank of England to cease its active quantitative tightening (QT) programme, which they claim is contributing to elevated government borrowing costs and incurring billions in taxpayer expenses. The government's long-term borrowing costs have risen to levels not observed this century, with the 30-year gilt yield reaching its highest point since 1998 last month.
The Bank of England is currently the only major monetary authority actively selling its bonds, a process that adds to the supply of long-dated gilts and lowers their price. This approach differs from other central banks, which have largely allowed bonds to mature without replacing them.
Officials at the Bank of England have previously defended their active QT strategy, citing the government's historical issuance of a greater proportion of longer-dated bonds. However, City analysts increasingly believe the central bank should end active sales, particularly as its balance sheet has shrunk by nearly half since the programme began four years ago.
The Bank of England last month increased its estimates for the impact of QT on long-term borrowing costs, acknowledging it has added up to 30 basis points to the yields of long-dated bonds. Furthermore, the Bank faces criticism over the pressure QT places on public finances, with estimated losses from the programme expected to reach as much as £125bn.
The Monetary Policy Committee is anticipated to vote next month on its bond disposal path for the year ahead. Deutsche Bank analysts predict the committee will vote to slow the pace of balance sheet reduction to £50bn and potentially halt active sales entirely.