Quantitative easing, and the unwind.

Quantitative easing, in the gilt market, is the Monetary Policy Committee deciding that the Bank of England should buy government bonds. The aim, once Bank Rate was about as low as it could usefully go, was to push down longer yields and to put more money into the hands of investors who would then buy other assets.

The buying is done by the Asset Purchase Facility, a subsidiary indemnified by the Treasury. The Bank lends the Facility the money. In the auction, a dealer sells gilts to the Facility. The dealer's bank is credited with reserves at the Bank of England — newly created central-bank money. The gilt moves onto the Facility's books. Private investors, taken together, hold fewer gilts and more deposits.

The debt has not been cancelled. The holder has changed. Coupons on the gilts come into the Facility. The Bank, meanwhile, pays Bank Rate on the reserves it created to fund the purchase. The difference is swept between the Facility and the Treasury under the indemnity. While Bank Rate sat below the yield on the bonds that had been bought, the sweep was money coming in. When Bank Rate rose above that yield, the sweep became a cost to the Treasury. That is why "the Bank owns the gilts, so the interest stays inside the public sector" was never the whole story.

Quantitative tightening is the same machinery run backwards. Two things reduce the stock.

A gilt in the Facility can mature. The government pays it off. The Facility uses that cash to repay the Bank, and the reserves that were created to buy the gilt are cancelled. No auction is required. This is the passive part.

Or the Bank can sell. From November 2022 it has offered gilts back to the market in auctions. A buyer pays cash, reserves are extinguished, and the gilt returns to private hands. The official measure of the stock falls by the initial purchase proceeds of the bonds sold — what the Bank paid when it first bought them — which is not the same number as the cash the buyer just handed over. If yields have risen since the purchase, the sale raises less cash than was originally paid, and the indemnity meets the difference.

The Monetary Policy Committee has set the pace of the unwind in purchase-proceeds terms, a mix of maturities and active sales. The chart below is only the active sales: the cash actually received. Maturities do not appear in it, so the chart understates how fast the stock has shrunk.

The emergency purchases of long and index-linked gilts in September and October 2022 are not in these QE totals. They were a financial-stability operation, held in a separate portfolio and then sold. That episode is on the mini-budget page. Corporate bonds bought under a separate scheme, and sold by 2023, are not in these gilt figures either.