The Bank of England’s recent revelation that its quantitative tightening (QT) policy could cost the Treasury £120 billion has sparked debate over the role and accountability of the central bank in the United Kingdom's economic governance. The policy, which involves selling government bonds purchased during the quantitative easing (QE) programme, represents a significant shift in the financial relationship between the Bank and the government.
When the Bank of England was granted independence in 1997, the objective was to separate monetary policy—such as setting interest rates—from fiscal policy controlled by the Treasury. However, the financial crisis of 2008, the COVID-19 pandemic, geopolitical tensions, and trade disputes have complicated this division. The Bank’s large-scale bond purchases through QE were designed to support the economy, but the subsequent QT, aimed at reducing the central bank’s balance sheet, has substantial fiscal implications.
The £120 billion figure arises from the losses related to bonds held by the Bank’s Asset Purchase Facility (APF), a subsidiary set up to manage QE assets. These losses occur because the Bank is selling government bonds at current market prices where yields have increased compared to when the bonds were initially acquired, lowering their market value. Additionally, the income generated from the £500 billion in bonds held by the APF is less than the base rate repayments on the loans the Bank took to purchase them. The maturity of bonds bought at premiums also results in recorded losses.
The Treasury currently indemnifies the Bank against these losses, an arrangement established after the 2009 financial crisis and significantly expanded in 2012 under Chancellor George Osborne. This indemnity has functioned as a revenue source for the Treasury during periods of low interest rates, generating profits exceeding £124 billion. However, with rising rates, the Treasury now faces substantial costs, and the mechanism remains uncapped, meaning payments to the Bank continue even after prior windfalls have been recouped.
Former Bank deputy governor Charlie Bean has acknowledged that maintaining central bank independence does not justify leaving such influential fiscal consequences solely to an unelected Monetary Policy Committee (MPC). Critics argue that the current arrangement blurs the line between monetary and fiscal policy, effectively transforming the Bank’s decisions into fiscal interventions without parliamentary scrutiny.
The Bank’s governor, Andrew Bailey, has described the overall cost of QT as "neutral" over a long-term view spanning six decades. However, economists like Patricia Pino highlight that budget decisions are made within much shorter democratic cycles, typically over years rather than decades, raising concerns about the sustainability and democratic legitimacy of the current framework.
In response to these issues, reports indicate that the Treasury and the Bank are considering reforms to the QT process to mitigate its effects on interest rate decisions and fiscal stability. Observers underline that no other major central bank operates under a comparable indemnity structure, and many call for the government to end this arrangement to restore clearer boundaries and accountability between monetary and fiscal authorities.