Quantitative tightening: who is guilty for the gilts?

Thirty year gilt yields have climbed to levels last seen in 1998, hovering around 5.7 per cent at points this year. That is not just market noise. It is the price of Britain’s borrowing rising steeply. And the Government is a mere spectator to all this, with neither the ability nor the understanding to do anything about it. That is a scandal.

The reality is that there are international factors at play. But more significantly there is a domestic truth barely acknowledged, rarely commented on in the media, and scarcely understood anywhere in Downing Street.

The Bank of England is unloading government bonds, shrinking its balance sheet, and in the process forcing borrowing costs up. This is happening without a democratic mandate, without explanation, and with the public left in the dark about what it means.

Quantitative easing was invented to save us in 2008. The financial system was on the verge of seizing up. The Bank printed money, bought gilts, and kept the economy liquid when it looked like the cash might run out altogether. In that moment QE was necessary. But it did not stop there. It was used again after Brexit, and then again on a vast scale to prop up Covid-shuttered Britain. The legacy has been asset inflation, house price bubbles, weak wages, and dismal productivity. QE kept us alive, but only just. It zombified the economy.

In 2022 came the reversal. Quantitative tightening is the bitter pill hardly anyone has noticed the country being forced to swallow. Since then the Bank has been dumping bonds back into the market, cutting its holdings from £875 billion to about £558 billion. That includes about £100 billion so far this year alone. The Bank admits this has raised borrowing costs by up to a quarter of a percentage point, which means £16 billion in extra lifetime interest payments. Independent studies suggest the cost may be closer to £60 billion. Spread across the country, that is between £570 and £2,000 per household, quietly siphoned off to service debt.

The consequences are brutal. QT works. It is boosting productivity, forcing capital into efficient uses, and making Britain for now one of the fastest growing economies in the G7. But this growth comes with casualties. Non productive firms collapse. Unemployment rises. House prices stall. A wave of creative destruction ripples through the economy, with winners and losers determined by balance sheets. Companies with low debt to earnings ratios will thrive. Equities are booming, with the FTSE 100 already up 12 per cent this year. Those carrying too much debt will go to the wall. International investors are poised to pour capital into Britain after fifteen years of suppression, but through equities not through the traditional banking system. For some the future looks bright.

And here lies the problem. Government policy is still built on the idea that growth is the cure for everything. It is not. Growth is coming, but it is not the kind of growth the Labour Government hopes for. It will be unequal growth. It will deliver record profits to listed companies, but drive weaker firms under. It will inflate share prices, but expand unemployment. There will be big winners and terrible losers. The Treasury’s welfare bill will climb, crime will rise, and social deprivation will deepen. All of this comes with its own enormous price tag, one that risks swallowing the tax revenues of the very growth ministers like to boast about.

The tragedy is that if ministers understood what was happening they could do something about it. Britain is on the brink of an investment boom. Pension funds, private equity, international capital, all are desperate for opportunities after years of suppressed returns. But instead of embracing this, the Government clings to its tax and spend dogma. GB Energy and large scale infrastructure funded by the state will all be weighed down by the fiscal straitjacket of higher debt costs and ballooning welfare spending. The opportunity lies in harnessing private capital, opening the doors wide to investors, and channelling their money into the parts of the country that need it most. Done right, the payback could be transformational.

But those in government do not see it. Rachel Reeves cannot act as if she controls the quantitative levers, because she does not… I’m not sure she even knows where they are. The levers sit in Threadneedle Street, in the hands of nine unelected technocrats on the Monetary Policy Committee. Governor Andrew Bailey and his fellow committee members Clare Lombardelli, Dave Ramsden, Sarah Breeden, Huw Pill, Swati Dhingra, Megan Greene, Catherine Mann, and Alan Taylor (head-shots pictured above) decide the boundaries of policy — not Parliament. The average voter has no idea who they are. Most MPs probably have no clue either. Yet their choices cost every household hundreds, even thousands, of pounds, and plot the future of the UK’s economic fortune and government fiscal policy. Our future is decided in an oak panelled room in the Bank of England, a mile from the doorsteps of Downing Street, but a thousand miles away in figurative policy distance.

I support QT. It is right. It is necessary. It is rebuilding the economy after fifteen years of distortion. But the way it is being done silently, without a mandate, without even any explanation, is dangerous. Growth will not solve everything. It will tear parts of society apart even as it lifts others. Unless government ministers wake up, understand what is happening, and embrace the tools of private investment to manage this transition, Britain will face growth accompanied by unemployment, deprivation, crime, and a colossal welfare bill. The numbers will look good on paper. The reality for millions will not.

Democracy can withstand tough medicine. What it cannot withstand is the silence and denial that surround this seismic change in the economy. If people do not understand what is happening, if they do not feel included in the choices, they will be driven into the arms of those who shout simple answers the loudest. That is the true danger of quantitative tightening in Britain: not the policy itself but the vacuum in which it operates.

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