We have a clear exit strategy as Bank unwinds its debt purchases

Of all the big economic interventions of the last two decades, the purchase and sale of government debt by the global central banks is, arguably, the least well understood.

In contrast to the bailout of banks in 2008, near-zero interest rates through the 2010s, the furlough schemes and business loans of the 2020 pandemic, and the huge interventions in energy markets in 2022, the purchase of debt (known as quantitative easing) – and more recently its sale (known as quantitative tapering) - has remained in the shadows. This is despite the magnitude of those purchases. Total ownership of government debt by central banks reached more than $28 trillion, globally, by 2021.

Part of the reason for the relative ignorance is the indirect impact of these transactions. Central banks buying government debt initially pushed down the interest rates faced by all borrowers – households, businesses and of course governments themselves. More recently sales of that same debt have pushed those same interest rates back up. But whilst these directional impulses are clear, the exact impact on interest rates - and the economy more widely - remains contested by economic researchers to this day.

Last week this opaque policy did, briefly, emerge from the shadows. The Bank of England - an organisation that at its peak had bought almost £900bn of UK government debt - announced an eight-year program to sell, and otherwise offload, the remaining £488bn of UK government debt it still holds.

That announcement came alongside a decision to hold the official UK interest rate at 3.75% despite mounting inflationary pressures. Together this package was greeted by cautious enthusiasm in financial markets. A central bank like the BoE holding more than a third of government debt - as it did at its peak - was never healthy. The independence of the Bank’s actions and the jeopardy it posed for taxpayers were seen as risks worth taking during periods of economic volatility. The purchases were deemed necessary such was the extraordinary impact of the Global Financial Crisis and COVID-19 pandemic.

A roadmap, albeit a complex and lengthy one, to a destination where the Bank of England will no longer own any Gilts for monetary policy purposes is an important moment. But it won’t be without political controversy, nor without financial headaches for His Majesty’s Treasury.

Let’s take each of these in turn.

Firstly, last week’s announcements were carefully choreographed between the Bank of England and the Treasury. Whilst co-ordination is always preferable to mixed messages, it risks fueling concerns that the Bank of England is doing the government’s bidding rather than making purely independent policy choices. This matters, narrowly, for the Bank’s credibility in markets to fight inflation, and maintain financial stability.

Secondly, it also matters, more broadly, for simmering criticism that the Bank’s actions in the run-up to the 2022 Mini Budget were rather less supportive, than these are in the run-in to next month’s 2026 Budget. My own opinion is that these latter criticisms, led by former Prime Minister, Liz Truss, miss out important details. In particular, her approach ahead of the Mini Budget was to deliberately sideline and undermine the Bank of England, the Treasury, and the OBR. It’s rather trite to criticise institutions for not helping you if you deliberately kept them in the dark.

Now that the Bank has unveiled a plan to rid itself of government debt comes the hard part for the Treasury, and its agency - the Debt Management Office (DMO). It is poised to buy back almost £150bn of Gilts that the Bank owns that mature in the second half of the 2030s and 2040s. It will do so by issuing new debt. It must now make outsized choices on whether it issues short-dated bills, making the government’s debt interest bill increasingly sensitive to short term moves in interest rates. Or it can issue long-dated debt and lock in high interest rates for decades to come. Whilst the DMO make such choices every week as it helps the government finance almost £3 trillion of borrowing, this is a new version of that challenge with fresh financial risks if they get their judgement wrong.

As I wrote about in these pages just a fortnight ago, finance ministries around the world - led by Scott Bessent, the US Treasury Secretary - are now making the type of financing bets usually reserved for hedge funds and traders. It is an inevitable reaction to facing intense competition for capital from a cash hungry technology sector, the resurgence of energy-led inflation, and spendthrift political masters that collectively are pushing up interest rates. UK Treasury officials are keen to play down the uncomfortable parallels in debt markets to similar activities taking place in Washington. But there is no getting away from the decisions that must be made. And taxpayers are on the hook if they go wrong. The end game for this period of exceptional monetary policy measures was never going to be straightforward.

All these moving parts have a relevance to another looming economic event - the UK Budget on 28 October. Lower interest rates, as well as delayed and averted losses from the Bank of England selling government debt at a loss, are helpful for the government’s financial headroom. This won’t be sufficient to offset the big increase in interest rates since the start of the Iran War, but certainly is welcome news as Chancellor, John Healey, faces up to the challenge of managing the UK’s stretched public finances. Good news in that regard has been in scant supply in recent weeks.

This column probably leaves Times readers in no doubt why Quantitative Tapering and Quantitative Easing never caught on as watercooler or pub conversation topics. But these policies had, and still have, a dramatic impact on mortgages, savings, and the public finances. The good news is that we now have a clear exit strategy from a period of extraordinary monetary policy. The bad news is that a lot can happen during the eight years it will take. And almost certainly will.