The Bank of England (BOE) remains at the center of debate over how quickly it should shrink the vast portfolio of government bonds accumulated during years of quantitative easing (QE). At a recent policy gathering, Chief Economist Huw Pill broke with the majority of the Monetary Policy Committee (MPC) by insisting the central bank should move faster in reducing its balance sheet. His position highlights the tension between safeguarding market stability and restoring monetary flexibility after more than a decade of extraordinary stimulus.
A Divided Committee on Quantitative Tightening
The immediate controversy arose from the MPC’s decision to slow the pace of quantitative tightening (QT). By a vote of seven to two, policymakers opted to reduce the annual pace of balance sheet shrinkage from £100 billion to £70 billion. This shift reflected concerns that gilt markets, particularly in long-dated bonds, could come under renewed strain if asset sales remained too aggressive. Pill was one of only two officials who dissented, preferring to maintain the faster pace of QT at £100 billion.
For Pill, the case for sticking with the quicker unwind lies in his conviction that UK markets are more resilient than many colleagues believe. He argued that liquidity and functioning in government debt markets have improved since past episodes of volatility, suggesting investors could absorb heavier sales of gilts without destabilization.
Confidence in Market Resilience
In his remarks, Pill underscored that the BOE possesses effective tools to intervene if strains do emerge. He pointed to the precedent set during the turmoil following the 2022 “mini-Budget,” when the central bank temporarily purchased long-dated gilts to protect parts of the pension sector from collapse. That episode demonstrated the BOE’s capacity to act swiftly to restore order without undermining its broader commitment to reducing the QE portfolio.
“I put a higher weight on the need to exit the QE portfolio more quickly,” he explained, stressing that the Bank should rely on targeted interventions if markets falter, rather than prolonging its exposure to a balance sheet swollen by past crises.
The Scale of QE Legacy
The BOE’s balance sheet remains burdened with nearly £600 billion of government bonds purchased during successive rounds of QE since the 2008 financial crisis and the pandemic. At its peak, the stockpile totaled almost £895 billion. While QE helped stabilize the economy in moments of acute stress, unwinding the program has created complications for both the Bank and the Treasury.
By choosing not to reinvest proceeds from maturing bonds and by actively selling gilts, the BOE has steadily reduced its holdings. Yet the financial implications are significant: once interest rates rose above 2%, the cost of servicing the reserves created for QE began to exceed the income earned on the assets. This reversal has generated mounting losses.
Rising Costs and Fiscal Implications
Since 2022, the BOE’s QE portfolio has run up losses of roughly £93 billion, offsetting much of the £124 billion in profits accumulated over the previous decade. The Treasury now faces a bill that could leave taxpayers more than £100 billion out of pocket over the lifetime of the program. In the last year alone, the scheme added £18 billion to government borrowing costs, limiting the fiscal room available to the Chancellor of the Exchequer.
Pill acknowledged these challenges but rejected the notion that QE had been a mistake. He emphasized that the program was vital in stabilizing the UK economy during two historic shocks: the global financial crisis and the COVID-19 pandemic. The losses, in his view, stem from the design of fiscal rules rather than from the central bank’s monetary choices. He argued that the Treasury should establish frameworks capable of managing the fiscal consequences of QE unwind, freeing the BOE to focus on monetary policy and market functioning.
The Debate Over Pace and Risk
Supporters of a slower QT argue that reducing the balance sheet too aggressively risks reigniting stress in gilt markets, especially in segments where demand is fragile. They fear that sudden increases in bond supply could push yields sharply higher, complicating government borrowing and undermining financial stability.
Pill countered that these risks are overstated. With stronger market depth and with proven tools available to the BOE, he believes the Bank can pursue QT more predictably and at a faster pace without jeopardizing stability. His stance reflects a desire to demonstrate credibility in normalizing monetary policy and to minimize prolonged distortions created by QE.
Looking Ahead
The future pace of QT remains uncertain. Much will depend on market conditions, inflation dynamics, and the appetite of the MPC to balance caution with the need for normalization. For now, the majority’s preference for moderation has prevailed, but Pill’s intervention signals that the internal debate is far from settled.
As the BOE charts its exit from unconventional policies, the tension between monetary independence, market stability, and fiscal consequences will remain central. Whether the Bank ultimately accelerates or tempers the pace of QT, the stakes are high: the outcome will shape not only the health of gilt markets but also the credibility of the UK’s economic strategy.
