The £120 Billion Question: What Is Quantitative Tightening?
In August, the Bank of England disclosed that its quantitative tightening programme could cost the Treasury £120bn, according to the Bank's own Asset Purchase Facility quarterly reporting. That figure is not a projection plucked from a think-tank model or a worst-case scenario dreamed up by the Treasury's critics. It is the central bank's own accounting of the financial consequences of a policy it has pursued largely on its own authority — and it lands on the public balance sheet at a moment when the fiscal arithmetic in Whitehall is already unforgiving.
Quantitative tightening is the mirror image of quantitative easing. Between 2009 and 2021, the Bank created reserves to buy government and corporate bonds, swelling its balance sheet to roughly £895bn at its peak. QE was designed to push down long-term borrowing costs and stimulate demand when interest rates were already near zero. QT reverses that process: the Bank stops reinvesting the proceeds of maturing bonds and, in recent years, has actively sold assets back into the market. The stated goal is to normalise monetary conditions and reduce the central bank's footprint in financial markets.
The mechanics of that reversal matter enormously for the public finances, and this is where the £120bn figure enters the picture. When the Bank bought bonds, it paid for them with newly created reserves on which it pays interest — the Bank Rate. For much of the QE era, Bank Rate sat near zero, so the interest bill was trivial and the Bank remitted surplus income to the Treasury. Now Bank Rate is far higher, meaning the Bank pays substantial interest on reserves while receiving fixed coupons on the bonds it holds. The result is a large operating loss. Under the terms of the Asset Purchase Facility, the Treasury covers those losses. The £120bn figure reported by the Bank is the cumulative consequence of that arrangement.
The scale is difficult to overstate. For context, £120bn is roughly equivalent to the entire annual budget of the NHS in England, or to a significant share of what the UK spends each year on debt interest. The Office for National Statistics publishes monthly public sector finance data that captures these transfers, and the payments have become a material line item in the government's borrowing figures. What was once a technical footnote in monetary operations is now a first-order fiscal event.
How Bank of England Independence Blurred the Line Between Monetary and Fiscal Policy
When Labour granted the Bank of England operational independence in 1997, the settlement was elegant in its simplicity. The Bank would set interest rates to hit an inflation target, and the Treasury would control taxation and spending. Monetary policy lived in Threadneedle Street; fiscal policy lived in Whitehall. Two instruments, two institutions, two accountability chains — or so the theory went.
Read next Ukraine War Is Quietly Breaking India's StrategyThat tidy division has not survived contact with reality. The 2008 financial crisis, the eurozone turmoil, the pandemic, and the 2022 gilt market emergency each pushed the Bank into territory that looks unmistakably fiscal. QE suppressed government borrowing costs and, in effect, financed public deficits. The Bank's corporate bond purchases — including, controversially, holdings in companies with significant UK operations — allocated capital in ways that had distributional consequences. And the losses now crystallising from QT are being borne by taxpayers, not by the Bank itself.
The problem is structural, not personal. An institution accountable to Parliament only through remit letters and appearances before the Treasury Committee cannot be held democratically responsible for decisions that determine the government's borrowing requirement. When the Bank decides the pace of QT, it is effectively deciding how much the Treasury must pay. When it decides to sell long-dated gilts into a fragile market, it is shaping the cost of government debt for a generation. These are choices with fiscal magnitudes, made by officials who were appointed, not elected, and whose primary mandate is price stability, not fiscal sustainability.
The Resolution Foundation and the Institute for Fiscal Studies have both flagged the strain this places on the 1997 settlement. Former members of the Monetary Policy Committee have acknowledged in evidence to the Treasury Committee that the indemnity arrangement creates incentives the original architects did not anticipate. The Bank, in other words, can take risks whose costs land on the Chancellor's desk, while the Chancellor has no direct lever over the decisions that generate them. That is the definition of an accountability gap.
Who Pays the Bill? The Treasury Indemnity Arrangement Explained
The indemnity is the mechanism that transforms a central bank loss into a taxpayer liability. When the Bank's Asset Purchase Facility generates a shortfall — because the interest it pays on reserves exceeds the income from its bond portfolio — the Treasury makes it whole. Since the Bank's reserves are effectively the government's own liabilities, the indemnity exists to protect the Bank's balance sheet from insolvency and to preserve confidence in its independence. Without it, the Bank could not credibly conduct monetary policy at all.
But an indemnity that parks unlimited losses on the Exchequer creates a moral hazard. The Bank bears no direct financial cost for the scale of its balance sheet or the timing of its asset sales. The Treasury bears all of it, yet has no vote on the pace of QT and no ability to instruct the Bank to slow down. Ministers are accountable to Parliament for a bill they cannot control. The Governor is accountable to no electorate for decisions he can take unilaterally.
Last year, ministers paid the Bank a substantial sum under this arrangement, and the ONS public sector finance statistics recorded it as part of government expenditure. Each such payment displaces spending on hospitals, schools, or defence, or else adds to borrowing and debt. The £120bn cumulative figure reported by the Bank in its Asset Purchase Facility update makes plain that this is not a one-year anomaly. It is a structural feature of the post-QE world, and it will persist for as long as the Bank holds a large portfolio funded by interest-bearing reserves.
Power Without Accountability: The Democratic Deficit at the Heart of UK Monetary Policy
Bank of England accountability was designed for a world in which monetary policy meant setting a single interest rate. It was not designed for a world in which the Bank's balance sheet decisions move hundreds of billions of pounds between the central bank and the Treasury. The remit letter from the Chancellor, the inflation target, and the Treasury Committee's scrutiny sessions are the main accountability tools available. None of them gives Parliament a meaningful vote on QT, its pace, or the indemnity's terms.
Compare this with fiscal policy. Every tax change and spending decision must pass through the Commons. The Office for Budget Responsibility forecasts the public finances and holds the Chancellor to account for deviations. The National Audit Office examines value for money. None of these checks applies to the Bank's asset operations in any comparable way. The Bank publishes reports and answers questions, but publication is not the same as accountability. Accountability requires the ability to sanction, to reverse, or to withhold consent. Parliament currently has none of those powers over QT.
This is the democratic deficit at the heart of the £120bn bill. Decisions with the fiscal weight of a major spending programme are being taken by an institution insulated from electoral pressure by design. That insulation is appropriate for interest-rate setting. It is far harder to justify for operations that determine the government's cash position. The 1997 settlement drew a line; QT has erased it, and no one has redrawn it.
The Case for Reform: Rethinking QT and the Indemnity Policy
The most direct reform would be to end, or radically narrow, the indemnity. If the Bank bore more of the cost of its asset operations, it would have a stronger internal incentive to weigh their fiscal consequences. A narrower indemnity — capped, time-limited, or subject to Treasury approval for asset sales above a threshold — would restore some symmetry to the arrangement without compromising the Bank's operational independence on interest rates.
A second option is to slow the pace of QT. Active gilt sales put upward pressure on long-term yields and crystallise losses faster than passive run-off would. The Bank has already adjusted its approach in response to market conditions; a more explicit fiscal-impact assessment, published alongside each decision, would at least make the trade-offs visible. The Bank's Asset Purchase Facility quarterly reports provide the raw data. What is missing is a formal process for Parliament to interrogate the choices those reports reveal.
A third is institutional: give the Treasury Committee a statutory role in approving the indemnity's terms and in scrutinising major balance-sheet decisions, with the power to summon the Governor and demand impact assessments. That would not make monetary policy democratic — nor should it — but it would make the fiscal consequences of monetary policy subject to the same scrutiny as other public spending. The Bank of England accountability framework has not kept pace with the Bank's own balance sheet. Reform should restore the match.
What Genuine Central Bank Accountability Would Look Like
Genuine central bank accountability would begin with honesty about what the Bank now does. It is not a narrow technocratic body setting one interest rate. It is a balance-sheet giant whose operations shape the public finances, the gilt market, and the distribution of wealth in ways its founders never envisaged. The £120bn figure in the Bank's August disclosure is the clearest evidence yet that the old settlement has broken down.
In practice, accountability would mean three things. First, transparency with teeth: the Bank publishing full fiscal-impact assessments of QT decisions, not just balance-sheet reports, and the OBR including those impacts in its forecasts. Second, parliamentary consent: the indemnity renewed periodically with the Treasury Committee's explicit approval, and major asset-sale programmes subject to scrutiny before they are executed. Third, a clear division of responsibility: ministers should not be able to blame the Bank for a bill they have the power to cap, and the Bank should not be able to take decisions with fiscal consequences while claiming to be above politics.
None of this requires ending independence. It requires completing it — pairing the Bank's operational freedom on interest rates with a democratic chain of accountability for the fiscal-scale decisions that freedom now entails. Until that happens, the £120bn bill will keep growing, and the question of who is responsible for it will keep going unanswered.
Source: Opinion | The Guardian
