The four jobs of a central bank; quantitative easing and tightening through the bond market; why bond prices and yields move in opposite directions; the transmission channels, the risks, and the Bank of England’s unwind of £875bn of gilts.
From 2009 to 2021 the Bank of England bought £875bn of UK government bonds, gilts, with money it created, to push down long-term interest rates when Bank Rate was already near zero. Since February 2022 it has been doing the opposite: letting gilts mature and selling the rest, quantitative tightening. It cut the stock by £100bn in the year to September 2025 and set a target of £70bn for the year to September 2026, slower, because long-term gilt yields had risen and it did not want to add to the pressure.
On 17 September 2026 the Bank went further: of the £488bn left, about £120bn will be kept to back the banknotes in circulation, and the remaining £368bn will be run off by September 2034. It will stop selling long-dated gilts altogether and sell only short and medium ones. The same day it held Bank Rate at 3.75%; on 5 November it raised it to 4%.
What does buying and selling bonds do to the economy, and why does a central bank do it at all?
Source: Bank of England, Monetary Policy Summary 18 September 2025 and 17 September 2026; letter from the Governor to the Chancellor on the Asset Purchase Facility, 17 September 2026.
A central bank has four jobs. Monetary policy: setting Bank Rate, and buying or selling assets, to hit the inflation target. Lender of last resort: lending to solvent banks that cannot borrow elsewhere, to stop a run. Financial stability: supervising banks (the Prudential Regulation Authority) and watching the system as a whole (the Financial Policy Committee). Banker to the government and the banks: running the accounts through which payments settle.
Quantitative easing is the creation of central bank money, reserves, to buy financial assets, mainly government bonds, from investors. More demand for bonds raises their price. A bond pays a fixed coupon, so a higher price means a lower yield: yield = coupon ÷ price. Lower gilt yields pull down the long-term interest rates on mortgages and corporate borrowing, push investors into shares and corporate bonds (portfolio rebalancing), raise asset prices and so wealth, and give banks more reserves to lend. Quantitative tightening reverses it: the central bank sells bonds or lets them mature, prices fall, yields rise.
QE was used when Bank Rate hit its floor in 2009 and again in 2020. Its risks: asset price bubbles, wider wealth inequality, a central bank balance sheet exposed to losses when rates rise, and the blurring of the line between monetary and fiscal policy.
Between 2009 and 2021 the Bank of England created £875bn of new money and used it to buy government bonds.
It did not hand the money to the government or to households. It bought existing bonds from pension funds and banks in the market.
What was that supposed to do?
That is quantitative easing. With Bank Rate at 0.5% and later 0.1%, the Bank could not cut further, so it bought bonds to raise their prices, which lowers their yields and with them the long-term rates on mortgages and company borrowing. Since 2022 it has been selling them back: quantitative tightening.
The market for **gilts**. The Treasury issues them (supply); pension funds, insurers, banks and foreign investors buy them (demand). They clear at £100 per £100 nominal. A gilt pays a fixed coupon, here £4 a year, so at £100 the yield is 4%. That yield anchors every long-term interest rate in the economy, from five-year mortgage fixes to company borrowing.
Check: A gilt pays a £4 coupon each year for every £100 of nominal value and trades at £100. Its yield is:
Yield = coupon ÷ price = 4 ÷ 100 = 4%. If the price rose to £110 the same £4 would be 3.6% of the money paid: price up, yield down.
Quantitative easing. The Bank creates reserves out of nothing and buys £20bn of gilts. Demand shifts right to **D2**. The price rises to £110 and the yield falls to 3.6%. The Bank now holds the gilts; the investors who sold them hold new deposits. No tax was raised and no spending voted: this is monetary policy by the balance sheet.
Check: The Bank of England creates reserves and buys £20bn of gilts. Demand shifts to D2 and the price rises to £110. The yield:
Bond prices and yields move in opposite directions. 4 ÷ 110 = 3.64%.
From the bond market to the high street. Lower gilt yields mean cheaper mortgages and company borrowing, so investment and consumption rise. Investors who sold gilts buy shares and corporate bonds: portfolio rebalancing, which raises asset prices and household wealth. Banks hold more reserves and can lend more. A weaker pound helps exports. AD shifts right. The Bank’s estimate: the 2009–12 QE added about 1.5 to 2% to GDP.
Teacher tip: QE is not “printing money and giving it to the government”. The Bank buys existing bonds from private investors in the secondary market. The Treasury still has to find buyers for new bonds, though QE makes that easier, which is where the criticism comes from.
Check: Which of these is NOT a channel through which QE is meant to raise aggregate demand?
QE works through yields, portfolio rebalancing, wealth effects, bank reserves and the exchange rate. Taxation is fiscal policy.
Quantitative tightening. Since 2022 the Bank has sold gilts and let others mature. Demand net of the Bank falls to **D3**: the price drops to £90 and the yield rises to 4.4%, tightening credit on top of Bank Rate rises. The Bank slowed QT from £100bn to £70bn a year in 2025 because gilt yields were already high, and in 2026 stopped selling long gilts.
Check: Under quantitative tightening the Bank sells gilts or lets them mature without replacing them. Demand net of the Bank falls to D3 and the price falls to £90. The yield:
4 ÷ 90 = 4.44%. QT is QE in reverse: lower prices, higher yields, tighter financial conditions.
The other jobs. As lender of last resort the Bank lends to solvent banks that cannot fund themselves, as with Northern Rock in 2007. For financial stability it supervises banks’ capital and steps in when markets seize: in September 2022, after the mini-budget, it bought long gilts for thirteen days to stop pension funds collapsing, then sold them back. Same tool as QE, different purpose.
Check: In September 2022 pension funds faced margin calls as gilt prices crashed, and the Bank of England bought up to £65bn of long gilts for two weeks while it was in the middle of raising rates and planning QT. This was an example of:
The purchases were time-limited and aimed at market functioning, not at inflation; they were unwound within weeks. The Bank kept raising Bank Rate.
The price has risen to £110 but the label says the yield rises to 4.4%. A fixed £4 coupon on a £110 bond is 3.6%: price and yield move in opposite directions. QE lowers yields; it is QT that raises them.
Explain how quantitative easing is intended to increase aggregate demand, and evaluate the case for the Bank of England continuing to unwind its holdings of government bonds.
Quantitative easing is the creation of central bank reserves to buy financial assets, mainly government bonds, from investors. It was used from 2009 and again in 2020, when Bank Rate was at its floor and could not be cut further; the Bank of England bought £875bn of gilts in all.
On a diagram of the gilt market, the Bank’s purchases add to investor demand, shifting it right. The price of gilts rises, and because a gilt pays a fixed coupon, a higher price means a lower yield: a £4 coupon on a £100 bond yields 4%, on a £110 bond 3.6%. Lower gilt yields pull down long-term interest rates on mortgages and corporate borrowing, so consumption and investment rise. Investors who sold gilts buy shares and corporate bonds, raising their prices and household wealth; banks hold more reserves to lend; and lower yields tend to weaken the pound, helping exports. Through these channels aggregate demand shifts right. The Bank estimated that the first rounds of QE added around 1.5 to 2% to GDP.
Quantitative tightening reverses the process: the Bank sells gilts or lets them mature, prices fall and yields rise. It reduced its stock by £100bn in the year to September 2025 and £70bn in the following year, and in September 2026 set out a plan to run off the remaining £368bn by 2034 while keeping about £120bn to back banknotes, and stopped selling long-dated gilts.
The case for continuing rests on principle and on cost. The Bank has said the asset stock is not permanent: unwinding it restores room to use QE in the next crisis and keeps monetary and fiscal policy separate. Holding the gilts costs money, because the Bank pays Bank Rate on the reserves it created while receiving lower coupons, and selling at a loss crystallises what the Treasury has agreed to cover. **However,** QT raises gilt yields and so the government’s borrowing costs and mortgage rates at a time when both are already high, which is why the Bank slowed the pace and stopped long-dated sales. Letting bonds mature achieves the same end more slowly at less risk to market functioning. The September 2022 episode showed how fragile the gilt market can be. On balance a gradual unwind, mostly by maturity and with the flexibility to pause, is justified; an aggressive one would tighten policy by the back door while Bank Rate is doing the job in front.
Asset Purchase Facility figures: Bank of England, Monetary Policy Summary and letters from the Governor to the Chancellor, 18 September 2025 and 17 September 2026. The bond market on the diagram is invented, chosen so the yields are easy to calculate. Diagrams drawn with Rough.js and perfect-freehand, both MIT licensed.