Who’s afraid of quantitative tightening?

The Bank of England has cut interest rates from 4.75% to 4.5%, a move widely anticipated by everyone. What was surprising, however, was the avalanche of bad news that came with it. Andrew Bailey, the Governor of the Bank of England, told us the UK would narrowly avoid a recession—but it feels like we’re really, really trying to get ourselves into one. Inflation is expected to rise again to 3.7% by late 2025, driven by escalating energy prices, increased water bills, and higher transport costs. Growth forecasts have been halved to 0.75% for 2025, a significant downgrade from 1.5%. And let’s face it: 1.5% growth isn’t exactly ripping up trees.

So, the Chancellor, Rachel Reeves, welcomed the rate cut, but expressed concerns about the overall health of the economy. If I were her, I’d be slightly more than concerned.

Amid all the talk of interest rates, sluggish growth, and inflation, there remains a critical yet underexplored factor: quantitative tightening. It’s arcane, technical, and dull—but its implications for the broader economy are profound. And nobody in the political establishment seems to care.

Between 2008 and 2022, the Government (or rather, the Bank of England) injected £895 billion of electronic money into the economy by purchasing government bonds—gilts—from pension funds, banks, and investors. This was quantitative easing (QE). To put it in perspective, this sum is approximately 40% (depending on the measurement tool) of the UK’s yearly GDP, effectively conjured up by the Bank at the flick of a digital switch. This strategy kept borrowing costs low, inflated asset prices (notably housing), and just about sustained some semblance of economic momentum from the pandemonium of the financial crash to the Armageddon of COVID-19.

But at some point, the chickens had to come home to roost. All that conjured-up cash was doing irreversible damage to the UK economy. It pumped up asset prices to unsustainable levels, locking younger generations out of homeownership and leaving them stuck at home with Mum and Dad. Productivity has been smashed to pieces, and we’re stuck in a doom loop of stagnation. This isn’t a conspiracy theory—most economists point to these exact factors as the reason behind Japan’s lost decade and its ongoing struggle with growth.

So, over the past few years the Bank of England has slammed QE into reverse. First by ceasing reinvestment in maturing gilts and then actively selling them off since September 2022, the Bank has embarked on quantitative tightening (QT)—draining money from the system rather than injecting it. By September this year, it will have withdrawn £300 billion from the financial system—equivalent to 11% of yearly GDP, the same as the annual budgets of the NHS, education, and defence combined.

It’s massive. But despite its scale, it’s barely being talked about. And if Newton’s Third Law—every action has an equal and opposite reaction—holds true, then we should expect QT to have the reverse effects of QE: lower house prices, higher wages, increased productivity, and higher unemployment.

You can see this playing out in the wider economy right now. The UK’s unemployment rate rose to 4.4% in the three months to January, up from 4.0% a year earlier, marking an increase of 186,000 unemployed individuals over the year. This has something to do with the last Budget, but I’m going to stick my head out and say this is the thin end of the wedge. I can conceive of unemployment doubling—potentially exceeding 10% in the next three to four years, and that long-term trend has everything to do with QT.

On the housing front, average UK house prices increased by 3.3% to £290,000 in the last 12 months. However, this headline rate of housing inflation is misleading. The volume of housing stock being sold has fallen through the floor, artificially keeping headline house prices inflated. The fact is, there’s a huge amount of housing stuck in limbo, with perpetual “For Sale” signs outside properties, because homeowners are valuing homes at prices that are out of kilter with real-term values. The market is undergoing a massive revaluation, but whereas previous downturns led to a crash followed by a recovery, the market is now flatlining for years until wider economic inflation catches up. At that point, the market will start moving again.

In crude terms: traditionally, when the UK housing market got sick, it suffered from dysentery. Today, it’s constipated.

And the process of quantitative tightening is far from over. The Bank of England is expected to pull another £100 billion out of the economy every year through QT for the next six or seven years. That’s more cash drained from the system, more pressure on asset values, and more strain on businesses and households already feeling the squeeze. We’re rebalancing the economy—and that always hurts.

This isn’t a UK-only policy. The Federal Reserve is pursuing a similar approach, but the impact of quantitative monetary policy has been more pronounced in the UK. Why? Because we injected (and are now withdrawing) a much larger percentage relative to the size of our economy. The QE cash injection in the UK represented around 40% of our annual GDP, while in the US, it was only about 23%.

Now, as you might have noticed, there’s a new broom in the White House. I don’t know if Donald Trump fully understands the Fed’s monetary policy. But one thing’s clear: QT devalues assets—and Trump’s entire fortune is tied up in real estate and speculation. If he realises QT is making him and his friends poorer, there’s no way he’ll let the Fed continue without a fight. And if the Fed caves, pressure on the Bank of England will follow.

Rachel Reeves, given her background, must understand the ramifications of all this. But to my knowledge, she’s never explicitly addressed quantitative tightening. She’s occasionally touched on monetary policy, but never on QT’s long-term impact on employment, house prices, wages, and productivity—essentially, the entire economy. The mantra is: the Bank is independent, so it’s not appropriate for the Government to comment on QT.

This omission might be strategic. After all, QT means falling house prices and rising unemployment. A vote for Labour as the party of rising unemployment and falling home values would be electoral suicide. Reeves may believe the benefits outweigh the negatives, preferring to brush those negatives under the carpet as long as, by the next election, she can present a high-wage, growing, and more productive economy than the one she inherited.

And, honestly, might she be right? I think the positives will outweigh the negatives. But why the hell aren’t Reeves and Starmer shaping the narrative around the benefits of QT? Instead, we get vague “growth agenda” soundbites, extended cabinet meetings, and the biggest outward expression of this “growth vision” being… a third runway at Heathrow and a half-built rail line between Oxford and Cambridge?

Our politicians need to think bigger, bolder, and smarter—and that starts with understanding the root causes of what’s happening in the economy. And then explaining that to the electorate through smart, coherent messaging. Right now, they’re running away from QT, because it’s a hard issue to explain.

The UK might not be growing, but the economy is evolving, changing, and mutating. Reeves has to get her head around how to nurture this and work these themes into compelling narratives. At the moment, she’s just standing by as an interested bystander. And Starmer has to be involved. Right now, he looks like the spectator of the bystander.

And where the hell are the Conservatives in all this? QT started on their watch in 2022, but they’ve gone completely silent. They should be hammering Labour on unemployment and the housing crisis. Fifty years ago Margaret Thatcher began her time as Leader of the Opposition by calling on the Labour government to return to “sound money”. If Sir Keir Starmer can’t or won’t explain to the public how QT is impacting our lives, that is an opportunity for Kemi Badenoch. She should seize it with both hands.

So here we have the biggest economic policy in a generation—completely ignored, misunderstood, and unsold to the electorate. Democracy needs politicians to inform and debate these issues, but they run away from them. Thatcher managed to communicate to the public about reforming the economy—good and bad. Even Cameron and Osborne pulled the nation into a whole narrative about austerity and asked to be judged on it.

Today’s politicians seem happy to run away from these issues, seeing them as too hard to explain—basically assuming the public is a bit too thick to understand. And that’s an appalling position to be in, for democracy, for the economy, and society. Who’s afraid of quantitative tightening? More or less everyone in politics, it seems.

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