Quantitative tightening, or QT, has become one of the most opaque parts of modern monetary policy—despite its growing importance as inflation remains elevated and government bond markets swing sharply. In simple terms, QT is the process of running down a central bank’s balance sheet after the large-scale bond buying carried out under quantitative easing (QE), which was deployed during the global financial crisis and again in the pandemic.
In the UK, the Bank of England has stood out for pursuing an unusually “active” form of QT. Rather than merely allowing gilts it holds to mature and roll off its books, the Bank has also sold bonds into the market. That approach has drawn criticism because today’s environment—high yields and low bond prices—means sales can crystallise losses, raising questions about value for money.
Bank of England governor Andrew Bailey has argued publicly that, from the taxpayer’s perspective, the eventual financial outcome should be broadly similar regardless of whether the exit is “active” (selling) or “passive” (holding to maturity). But recent debate has been sharpened by analysis from David Aikman, director of the National Institute of Economic and Social Research, who suggests that the Bank’s newly announced adjustments to QT could reduce the cost to taxpayers by as much as £1 billion per year.
The disagreement turns on an arcane but crucial point: how to interpret the yield curve. Bailey’s logic effectively assumes that future short-term interest rates will evolve exactly as implied by the current curve. Under that assumption, the Bank Rate over coming decades would average roughly the same as the 30-year gilt yield—currently just under 6%.
Aikman’s approach differs in a way that matters for policy. He treats long-dated yields not as a precise forecast of future policy rates, but as a combination of expected rates plus a “term premium”—extra compensation investors demand for bearing uncertainty over long horizons. Many commonly used models indicate the term premium is currently high, particularly at the long end of the curve. If that is true, selling long-term bonds into the market can mean paying that premium, making rapid sales more expensive than the Bank’s simpler yield-curve assumption suggests. In that world, selling fewer bonds—or changing which bonds are sold, as the Bank’s revised plan does—could avoid unnecessary costs.
Explaining QT through term premia is unlikely to make central bank communication easier. But the larger question is not about jargon; it is about transparency on trade-offs. The Monetary Policy Committee has said it intends to transfer around £146 billion of gilts from the Asset Purchase Facility to the UK Debt Management Office while continuing to allow maturing gilts to roll off. The plan implies a steady pace of roughly £20 billion per year through 2034, and it also includes a pause in gilt sales until April 2027 while coordination with the DMO is put in place.
The MPC has indicated it considered faster, slower and more flexible routes. Ultimately, it leaned toward a fixed pace to maintain predictability. Yet predictability can harden into rigidity. During QE, the Bank committed in November 2020 to continue bond purchases through December 2021. By May 2021, inflation was already above target and accelerating, but purchases continued—adding roughly £70 billion of gilts even as price pressures intensified. A more responsive approach, critics argue, might have reduced both the inflation overshoot and the later losses associated with QE.
With QT now mapped out over an eight-year horizon, the call from researchers is straightforward: subject QT to the same kind of scenario analysis used elsewhere in monetary policy, so the public can see how decisions were reached and what risks were accepted.
Why it matters
QT influences borrowing costs across the economy and can affect taxpayer exposure through the way the Bank finances its bond holdings. Greater clarity on the assumptions behind QT—especially around future interest rates and term premia—would make it easier to judge whether the chosen pace is cost-effective and appropriate for volatile markets. What to watch next is how the Bank coordinates with the Debt Management Office and whether it builds flexibility into a plan that currently extends to 2034.