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The Treasury Committee concludes the Bank of England’s programme of active quantitative tightening is a leap in the dark as the Bank has not been able to fully consider the broader economic consequences.

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In its report, the Committee expresses concern about the uncertainty surrounding potential lifetime losses of £130 billion which could have huge implications for public spending.  

Quantitative tightening (QT) is the converse of quantitative easing (QE). QE is the purchasing of government debt by the Bank in order to stimulate the economy. The Bank of England implemented QE repeatedly in the thirteen years following the 2008 financial crash, creating £875 billion of new money.  

As part of QT, the Bank is directly selling government debt back into the market.  

In 2022, amid the outbreak of inflation, the Bank of England became the first major central bank to vote to sell debt back to the market as part of QT. The Bank’s Governor, Andrew Bailey, told the Committee that doing so would give them more space to purchase gilts again in future should the UK economy require it.  

The Treasury Committee determines the Bank has embarked upon a major monetary operation on which experts are divided regarding the risks and appropriate pace of implementation. This constitutes a leap in the dark, the Committee affirms, as the Bank continues to progress the work despite uncertainty over QT’s wider effects.  

One area of high uncertainty related to the potential overall losses which may be incurred by QE and QT. It was estimated between £50 billion and £130 billion could be lost through the lifetime of the programmes, with potentially significant impacts for HM Treasury’s spending power for the next decade.  

While recognising that QT is not considered an active monetary policy tool by the Bank, the Committee determines that decisions are being taken regarding vast amounts of taxpayers’ money without any regard to value for money. While acknowledging the need to keep monetary policy and inflation as their foremost monetary focus, the Committee asks the Bank of England and Treasury to explore how value-for money criteria could be included in decisions about the ongoing pace of QT and to consider what lessons can be learned about how QE should be used in future.   

The Bank of England delayed the implementation of QT following the announcement of the 2022 ‘mini-budget’ and the related disruption to pension funds and the gilt market. During this period, the Bank made further gilt purchases in order to stabilise the financial markets.   

The Committee agrees with the Bank’s plan to create a backstop facility which allows it to react to any future unplanned market disruption, with members recommending the Bank explores an option to go a step further and produce another contingency to suspend QT and/or restart gilt purchases in case of a large financial shock.  

In the report, MPs highlight the conflicting evidence submitted regarding the role of the Chancellor of the Exchequer in overseeing changes in the size of the facility which holds government bonds purchased though QE. They ask for clarity on the extent to which Bank decisions are waved through by government or whether the Chancellor is making an active decision following advice from Treasury officials.  

Chair comment

Chair of the Treasury Committee, Harriett Baldwin, said:    

“It has become clear during the course of this inquiry that the decision to undertake a period of quantitative tightening is a leap in the dark for the UK economy.  

“I recognise that the Bank of England does not have a crystal ball and is in uncharted waters, but more can be done to develop forecasting and modelling tools which can help us understand the risks and benefits of QT.  

“With more public money at stake than was ever envisaged when QE was launched, the Bank and Treasury should take our advice and explore whether the usual value for money considerations can be factored in when deciding the pace and level of QT they implement.”