QE Losses Hit £125bn as Treasury Indemnity Draws Fire

Where the £125bn figure comes from

In a quarterly update on its Asset Purchase Facility published on 6 May 2026, the Bank of England revised upward its estimate of the lifetime cost of the quantitative easing programme, according to the central bank's own disclosure. The previous estimate stood at £115bn; the new figure is £125bn.

The programme's origins stretch back to 2009, when the Bank began purchasing government bonds, known as gilts, to push down long-term interest rates and channel capital into riskier assets. Between 2009 and 2021, the Bank accumulated roughly £875bn of gilts, a portfolio assembled in tandem with base rates held close to zero for nearly 14 years.

Since 2022, the Bank has been unwinding that portfolio through quantitative tightening (QT). The current pace is £70bn per year, a reduction from the earlier rate of £100bn agreed by the Monetary Policy Committee in September 2025. Of that £70bn, £21bn consists of active sales of gilts into the market; the remainder comes from bonds reaching maturity and simply rolling off the balance sheet.

The Bank said in the paper that its initial QE programme had "sustained employment and growth and reduced the tail risks of severe economic downturns," adding that "this macroeconomic support was the most significant effect of QE and generated fiscal benefits," according to the published update.

Critics accept that QE served a purpose during the financial crisis and the pandemic. Their objection centres on the mechanism by which losses are allocated and on the decision to accelerate the unwind through active sales rather than passive maturities alone.

Why the UK model is an international outlier

The feature that sets the UK apart from every other major economy is a 2009 indemnity arrangement between the Bank of England and HM Treasury, agreed under the chancellorship of George Osborne. Under its terms, all gains and losses from the Asset Purchase Facility flow directly to the Exchequer, and therefore to taxpayers.

The Federal Reserve, the European Central Bank, and the Bank of Japan each retain QE-related losses on their own balance sheets. Central bank losses in those jurisdictions reduce future remittances to their respective treasuries but do not generate an immediate cash call on public finances. The UK structure does.

During the low-rate era, the indemnity worked in the Treasury's favour: the Bank remitted roughly £120bn in surplus coupon income to the government between 2009 and 2022, according to previous Office for Budget Responsibility (OBR) analyses. Once rates rose sharply from late 2021, the arithmetic reversed. The Bank began paying a higher rate of interest on commercial bank reserves than it earned on its gilt holdings, and gilts sold before maturity crystallised capital losses.

"No other major economy imposes such large costs on its taxpayers as a result of monetary policy," Carsten Jung, a director at the IPPR think tank, told City AM.

Jung's criticism reflects a broader concern among economists that the indemnity structure removes any financial incentive for the Bank to minimise the cost of unwinding QE, because every pound of loss is automatically transferred to the public purse.

The knock-on effects for gilt yields and borrowing costs

The Bank's decision to conduct active gilt sales, rather than relying solely on passive maturities, has added a distinct supply pressure to the gilt market. When the government is already issuing large volumes of new debt to fund its deficit, additional sales from the Bank's portfolio increase the total supply of gilts competing for buyers.

Several market analysts have argued that this additional supply has contributed to upward pressure on gilt yields, as reported by City AM. Higher gilt yields feed through to the interest rate the government pays on new borrowing, but they also raise the cost of corporate debt. Sterling-denominated bond issuance, term loans, and even some floating-rate facilities are priced off gilt yields or related swap rates.

For SMEs and scale-ups refinancing facilities or seeking growth capital, the practical consequence is a higher cost of money. Each basis-point increase in gilt yields ripples outward into the rates quoted by commercial lenders.

The MPC's September 2025 decision to slow the overall QT pace from £100bn to £70bn per year was an acknowledgement of these concerns. Yet the simultaneous increase in active sales from £13bn to £21bn sent a mixed signal, suggesting the Bank still favours shortening the duration of the programme even at the cost of greater market impact.

Jung added: "Actively selling government bonds is adding unnecessary pressure to the gilt market. It should stop, just as every other major central bank has," as reported by City AM.

What this means for fiscal headroom and business taxation

The fiscal implications are stark. The OBR attributed £18bn of Exchequer costs to the QE programme in the last fiscal year alone, according to OBR data. That figure is comparable to the revenue the government expected to raise from the employer National Insurance contributions increase announced in the 2024 Autumn Budget.

In effect, the QE losses consumed a sum roughly equivalent to one of the largest single tax-raising measures of recent years. Every pound absorbed by the indemnity is a pound unavailable for public investment, departmental spending, or tax relief.

Over the next two fiscal cycles, the £125bn lifetime cost will continue to compress the headroom the Chancellor has against fiscal rules. If gilt yields remain elevated, the annual cash cost could persist at or near the £18bn level, further limiting the government's room to cut business taxes, fund infrastructure, or expand capital allowances.

For operators, the chain of causation runs in two directions. First, constrained fiscal headroom makes future tax increases, or the retention of existing ones, more likely. The employer NICs rise already added roughly 1.2 percentage points to the rate from April 2025; the political space for reversing or offsetting that measure shrinks when QE losses are consuming equivalent sums. Second, higher gilt yields translate into higher borrowing costs for businesses, raising the hurdle rate for investment and expansion.

The reform debate

Several proposals are circulating. The IPPR and other bodies have called for an immediate pause on active gilt sales, which would slow the pace of QT but reduce the crystallisation of capital losses. Others have suggested renegotiating the indemnity itself, perhaps moving to a model closer to the Federal Reserve's, where losses accumulate as a deferred asset on the central bank's balance sheet rather than triggering immediate cash transfers.

Neither option is without trade-offs. Slowing QT could leave the Bank with a larger balance sheet for longer, potentially complicating future monetary policy. Restructuring the indemnity would require Treasury agreement and could raise questions about central bank independence.

What is clear is that the £125bn figure has moved the debate from academic curiosity to fiscal urgency. The cost is no longer theoretical; it is landing in the public accounts now, and its effects on tax policy, spending choices, and borrowing costs are already shaping the environment in which UK businesses operate.