Hunt’s room for tax cuts squeezed by £15bn-a-year losses on Bank of England bond sales

Sir John Redwood, who formerly headed Margaret Thatcher’s policy unit, urged the Bank to stop actively selling bonds.

He said: “They’re making a double mistake having given us inflation with too much quantitative easing (QE). Now they’re giving us too much austerity by doing too much QT, forcing interest rates too high and suffering heavier losses.

“The Treasury, which is having to pay all these losses that we need not take, are then in no mood for tax cuts because they’re having sent so much money to the Bank of England.”

With the interest rate at 5.25pc, the amount the Bank pays to commercial lenders on reserves held at the central bank far outstrips returns on its stockpile of gilts.

The reverse was true when interest rates were at record lows, which saw a peak of £123.8bn in profits transferred to the Treasury between 2009 and 2022.  

Some economists have suggested that the Bank should scrap the interest paid on deposits from commercial lenders in a move that could save taxpayers billions of pounds.

However, Lord Macpherson, a former permanent secretary to the Treasury, said this could be seen as a tax on banks. 

He added: “If the Government started seeking to interfere with monetary policy, that would undermine the Bank’s independence and would then raise questions in the market about whether the Bank could be trusted, and so you might end up having to pay a higher premium on debt.

“My guess is there will be increasing political pressure to do something about this, either putting pressure on the Bank of England, which I think would be undesirable, or potentially taxing banks more, who have been the beneficiaries of this policy.”

It is understood that Treasury officials have been examining the mechanics of QT, although decisions about the size and composition of any bond sales are conducted by the Bank, which is operationally independent .