BoE holds rates at 4% and moderates bond sales
The Bank of England has kept interest rates at 4%, signalling caution as UK inflation remains nearly double its 2% target, and announced a reduction in the pace of its government bond sales to ease pressure on volatile gilt markets.
The Monetary Policy Committee (MPC) voted 7-2 to maintain borrowing costs, following five rate cuts since August 2024, including a 25 basis point reduction last month.
Annual inflation stood at 3.8% in August, driven in part by rising food prices. Two MPC members, Swati Dhingra and Prof Alan Taylor, dissented, advocating an immediate quarter-point cut.
Governor Andrew Bailey said:
“Although we expect inflation to return to our 2% target, we’re not out of the woods yet so any future cuts will need to be made gradually and carefully.” He added that the Bank would slow the pace of quantitative tightening (QT), reducing its planned reduction of government bond holdings from £100 billion to £70 billion over the next year, while shifting the focus toward shorter-dated gilts.
The move comes as policymakers navigate a complex backdrop: unemployment is at a four-year high, and growth in employment has stalled, in part due to last year’s £25 billion increase in employers’ national insurance contributions.
High borrowing costs for the Treasury, linked to gilt yields, also constrain fiscal manoeuvrability ahead of the autumn Budget on 26 November.
The Bank has highlighted that QT—selling off government bonds accumulated during quantitative easing—has contributed to upward pressure on gilt yields, affecting public finances.
Bailey noted:
“The new target means the MPC can continue to reduce the size of the Bank’s balance sheet in line with its monetary policy objectives while continuing to minimise the impact on gilt market conditions.”
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Business sentiment appears subdued. In a survey conducted by the Bank, firms cited consumer caution and uncertainty over forthcoming tax policies as key concerns.
The survey reported that family-owned and private businesses were wary of further inheritance tax changes, while inflationary pressures in consumer goods remain elevated, particularly for food and non-alcoholic drinks.
Shadow Chancellor Sir Mel Stride criticised the Bank’s cautious stance, arguing that the government’s tax policies have exacerbated inflationary pressures.
Nevertheless, the BoE expects modest recovery in growth, supported by improving market sentiment across its multidisciplinary portfolio, Bailey said.
The Bank’s decision underscores the delicate balance policymakers face between containing inflation and supporting a slowing economy, with financial markets closely monitoring gilt yields, borrowing costs, and the upcoming Budget for further guidance.
