By Deepanshu Mohan & Ankur Singh
As 2025 ends, a new kind of uncertainty is shaping the global economy. Slowing growth, political shocks and high public debt have made central-bank decisions more influential than ever. The balance sheets of major central banks now sit at the heart of global financial stability.
In this environment, investors, governments and markets are watching one shift closely: the global slowdown in Quantitative Tightening (QT). The world has spent over 15 years living with the legacy of Quantitative Easing (QE), first launched during the 2008 financial crisis to stabilise markets and lower borrowing costs.
Quantitative Tightening reverses this process by allowing central banks to reduce their bond holdings and withdraw excess reserves from the financial system. In theory, QT should raise long-term borrowing costs in a controlled manner and restore market discipline. In practice, it tests whether financial systems conditioned by prolonged central-bank support can function smoothly without it.
QT was meant to be the gradual and predictable reversal of the QE era. Instead, it has emerged as a fresh source of tension in financial systems that have become deeply dependent on central-bank liquidity.
Over the past decade, the conversation around monetary policy has centred mainly on interest rates. Yet a deeper look reveals a different fault line. Central-bank balance sheets, expanded massively during years of QE, now determine how shocks travel across economies. As these institutions try to shrink their holdings, the process is revealing weak links that were less visible before.
The UK example
The United Kingdom offers one of the clearest examples. In September 2025, the Bank of England announced that it would slow the pace of QT, cutting its planned balance-sheet reduction from US$ 1,33,86,30,00,000 to US$ 93,69,32,50,000 (£100 bn to £70 bn).
While framed as a routine adjustment, the move effectively acknowledged a growing constraint. Market demand for long-dated government bonds has weakened, term premia — the additional yield that investors demand to hold onto longer-duration securities — have risen, and dealers have limited capacity to absorb new supply. What was once seen as a mechanical task now carries real economic consequences.
Debate within the Monetary Policy Committee reflects this shift. QT is no longer a quiet background exercise. It now sits at the centre of conversations about financial stability. The UK is only the first major economy to confront the limits of balance-sheet reduction; many others are reaching similar inflection points.
The pattern is visible across advanced economies. In 2025, the US Federal Reserve slowed QT as concerns grew about declining reserves, a reminder of the funding-market stress seen in 2019. The European Central Bank faces the risk that uniform QT could widen bond-yield gaps between member countries. Japan, with its unusually large central-bank holdings, remains a potential source of global volatility if conditions shift abruptly.
Other advanced economies face similar pressure. Canada and Australia are experiencing QT colliding with large mortgage-refinancing cycles, raising concerns about household balance sheets. Emerging markets feel these pressures even more sharply because global dollar liquidity, influenced heavily by G3 balance-sheet policies, shapes their financial conditions.
Twin threats
Two challenges are becoming increasingly clear. The first is the fiscal cost of QE. In the UK, losses on the Bank of England’s asset holdings now fall directly on the Treasury due to an indemnity arrangement. QE effectively replaced long-term fixed-rate government debt with short-term floating-rate reserves. When interest rates rose, the cost of paying interest on those reserves jumped. Slowing QT may ease pressure on long-term bond yields today, but it raises future fiscal costs. These losses are now politically visible, adding scrutiny to every central-bank action.
This is not a uniquely British issue. The US Federal Reserve’s recent accounting losses have temporarily halted the remittances it would normally send to the Treasury. In the Eurozone, national central banks absorb losses separately, which obscures political accountability but not the underlying economic burden. QE shifted costs across time. Households and asset holders gained during the years of low rates, while the fiscal bill is now arriving for governments and taxpayers.
The second challenge is the strain on modern market plumbing. QE created abundant reserves and plentiful collateral, both of which supported the growth of new investment strategies and regulatory requirements. QT withdraws those same inputs. The 2022 UK Liability Driven Investment episode when the government bond market experienced extreme stress made this tension obvious. The Bank of England now regularly lends government bonds known as gilts to prevent shortages in repo markets (short-term funding markets where banks exchange securities for cash) highlighting how dependent the system has become on central-bank support.
The same dynamic is visible globally. The Fed’s decision to slow QT reflects concern about keeping enough reserves in the system. The ECB must avoid renewed fragmentation. No major economy can tolerate a steady rise in long-term yields without risking pressure on financial stability and government borrowing.
Blueprint for constrained sovereignty
The long-term conclusion is becoming harder to ignore. Central-bank balance sheets are unlikely to return to their pre-2008 size. Higher reserves are now a permanent part of modern monetary systems, and they come with an ongoing interest cost. This blurs the boundary between monetary and fiscal policy. The world has entered a phase where the two must operate more closely together.
Future crisis responses will be shaped by this reality. QE will no longer be used as freely as it was after 2008 because its exit carries visible fiscal and political costs. Coordination between treasuries and central banks will become essential.
The UK’s decision to slow QT reflects this new equilibrium. The idea that balance sheets could simply be normalised has faded. The challenge is not temporary. It reflects the underlying limits of a system that has grown around central-bank liquidity.
For developing economies, the implications are significant. If even the bond markets of advanced economies struggle to absorb QT, the risks for emerging markets are far greater. In 2024, 61 developing countries spent more than 10 percent of government revenues on interest payments, leaving little space for development spending. Slower QT in advanced economies extends the period of uncertainty. Currency pressures intensify, borrowing costs rise, and policy space shrinks.
The cumulative effects of past interventions shape the choices available today. The era when central banks could operate independently, focused mainly on interest rates and inflation, is over. Monetary policy now requires balancing financial stability, fiscal capacity and distributional outcomes.
The global slowdown in QT signals a broader truth. Central banks cannot fully exit without risking instability. When the lender of last resort cannot step back without unsettling markets, its autonomy becomes naturally constrained. This is the new reality of the post-QE world.
Deepanshu Mohan is Professor of Economics and Dean, IDEAS, Jindal School of Liberal Arts and Humanities, O.P. Jindal Global University, Sonipat, Haryana.
Ankur Singh is a Research Analyst with Centre for New Economic Studies, O.P. Jindal Global University.
Originally published under Creative Commons by 360info™.
