Taxpayers could be spared up to £5bn next year if the Bank of England changes course on its controversial bond sale programme , experts have said.
Analysts at Deutsche Bank have urged the Bank, led by Governor Andrew Bailey, to stop selling long-term debt amid a dramatic fall in bond prices, which could save new Chancellor Rachel Reeves from handing over billions to cover losses.
The Bank is currently unwinding its massive stockpile of gilts, built up over the past decade during the financial crisis and lockdowns, when it created nearly £900bn to support the economy.
At the time, interest rates were as low as 0.1pc, meaning the Bank earned more on government bonds than it paid in interest to commercial banks. But this has flipped since rates began to rise sharply, turning gains into losses.
As part of so-called quantitative tightening (QT), the Bank has started actively selling gilts back into the market. These sales have crystallised heavy losses, placing a further burden on Britain’s already strained public finances.
The drop in long-dated bond prices, caused by global investor jitters over economic uncertainty, has only intensified calls for the Bank to change tack ahead of a key September decision.
Sanjay Raja, Deutsche Bank’s chief economist, warned that if the Bank keeps selling all types of gilts equally – including long-dated ones – the Treasury could face a £24bn bill in the next year.
However, if sales are limited to short and medium-term gilts, that bill could fall to £18.9bn. And if the Bank scales back overall sales from £100bn to £75bn a year – as many in the markets expect – the cost could drop further to £15.6bn.
The Reform Party has gone further, calling for an immediate halt to all active bond sales.
The Treasury has already sent nearly £90bn to the Bank to plug the hole left by QT, including £53bn in interest payments to commercial lenders and £37bn in losses from bond sales.
Of that, around £20bn has come from selling longer-term debt, while losses from short-term sales amount to just £5bn, according to Deutsche Bank.
Mr Raja said: “From a borrowing perspective, less QT means less borrowing and less issuance. Moving from a £100bn envelope to £75bn would result in some meaningful savings on the borrowing side.
“Skewing sales away from longs to shorts/mediums evenly would also result in some modest savings. For a £100bn QT envelope, we estimate savings to be a non-negligible £5bn. No active sales would mean substantial savings, but only in the near-term.”
Pressure is mounting on Mr Bailey to reconsider the policy as losses grow. He has acknowledged that the “global steepening of bond curves” would “play into” the Bank’s decision on how to proceed.
Reform deputy leader Richard Tice urged the Bank to act now, saying: “They shouldn’t be selling anything at all. Zero.
“We now know that it’s driven up gilt yields, and the perception is it’s going to carry on keeping yields higher than otherwise should be. So what the Bank should be doing immediately is cancelling all further QT.”