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Quantitative Easing · 9 of 9

The Limits of Quantitative Tightening

Explain why selling gilts cannot drain banks' reserves without limit and how the Bank now supplies them, what it decided in 2026 about the gilts it still held, why the effect of the selling is disputed, and what decides how well the tool would work next time.

Before you start

What you'll be able to answer

  1. Why can't the selling drain banks' reserves as far as it likes, and how will the Bank supply them instead?
  2. What did the Bank decide in 2026 about the gilts it still held?
  3. How much did the selling tighten, and why is that disputed?
  4. Can the tool be used again, and will it work as well next time?

Where this sits

Quantitative Easing · this module is lit

  1. 1998The Bank of England Act gives interest rate decisions to a committee at the Bank; the Chancellor keeps the target
  2. Mar 2009Bank Rate is cut to 0.5 per cent, and the Bank starts buying government bonds with newly created money
  3. Aug 2013The Bank says it will not consider raising interest rates at least until unemployment falls to 7 per cent
  4. Mar 2020Bank Rate is cut to a new low
  5. Jan 2022Banks' reserves at the Bank reach their highest level
  6. Sep 2022The Bank buys government bonds again, to stop forced selling by pension funds
  7. Oct 2022Consumer price inflation reaches 11.1 per cent
  8. Nov 2022The Bank starts selling its bonds to investors, among the first central banks to do so
  9. Aug 2023Bank Rate reaches its peak after rises at consecutive meetings
  10. Apr 2026The Governor writes an open letter to the Chancellor after inflation overshoots the target

In September 2026 the Bank set out a plan for the gilts it still held

On 17 September 2026 the Bank of England published a plan for the government bonds (gilts) still left from quantitative easing. The gilts are held by the Asset Purchase Facility (APF), a company inside the Bank. The Bank had been shrinking those holdings since 2022, a year at a time, but its first sale had been held up by a crisis in the gilt market.

Predict first

In late September 2022, shortly before the Bank planned to make its first sale, gilt prices began to fall very fast. What do you think the Bank did?

In September 2022 the Bank bought gilts again, to stop a spiral of forced selling

After the government's fiscal statement of 23 September 2022, the yield on thirty-year gilts rose by 1.3 percentage points in three days. Falling gilt prices cut the value of liability-driven investment (LDI) funds, which many pension schemes invest in. The funds had borrowed, and their lenders asked for more cash. The funds sold gilts to raise it, and the selling pushed prices down further. From 28 September to 14 October the Bank bought £19.3 billion of gilts and put off its first sale. It bought only the gilts under most pressure, for as short a time as needed, to protect the financial system rather than to loosen policy. It had sold them all back by 12 January 2023.

Predict first

The Bank paid for its gilts with newly created money, called reserves, which banks hold at the Bank. When the Bank sells a gilt, what do you think happens to the reserves banks hold?

Selling gilts drains banks' reserves

An investor who buys a gilt from the APF pays through its bank, and the bank pays the Bank out of its reserves. So the reserves fall by the amount paid. Letting a gilt mature without buying another has the same effect: to repay it, the government sells a new gilt to an investor, who again pays out of a bank's reserves. As the APF's holdings shrank, the reserves held by banks shrank with them. The chart shows banks' reserves at the Bank from 2020, through their peak in early 2022 and the start of the sales later that year.

Banks' reserves at the Bank of England, 2020 to 2026Monthly average of reserve balances, £ billion
02004006008001,0002020202120222023202420252026PeakSales beginRepo borrowing rising

Source: Bank of England Database, sterling reserve balance liabilities, monthly average (LPMBL22). Open Government Licence v3.0.