bank of — The Bank of England has decided to keep interest rates unchanged at 4 per cent, a move that reflects ongoing challenges in the bond market. On Thursday, the Monetary Policy Committee (MPC) voted 7-2 to maintain this rate, following a quarter-point cut last month.
Bank of: Changes to Gilt Sales Strategy
In a notable shift, the Bank announced it would slow the pace of its quantitative tightening programme. This adjustment involves reducing the annual pace at which it unloads gilts to £70 billion from £100 billion. This change is intended to lessen the impact on turbulent bond markets, aligning with a median forecast from a Reuters poll, which had anticipated a cut to £67.5 billion.
Governor’s Insights on Market Conditions
Governor Andrew Bailey stated, “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 of gilt market conditions.” This marks the first slowdown in gilt sales since the Bank began unwinding its holdings in 2022, following extensive purchases amounting to £875 billion between 2009 and 2021, aimed at stimulating economic growth.
Diverse Opinions Among Policymakers
While the majority supported the reduction, differing viewpoints emerged within the MPC. Chief Economist Huw Pill argued for maintaining the pace at £100 billion, suggesting that the impact on markets was relatively minor. Conversely, MPC member Catherine Mann advocated for a more aggressive reduction to £62 billion.
Strategic Allocation of Gilt Sales
Looking ahead, the Bank plans to allocate gilt sales over the next year in a 40:40:20 split among short-, medium-, and long-dated gilts, based on their initial purchase price. This strategy is particularly relevant as long-dated gilt yields have recently surged to their highest levels since 1998.
Inflation and Economic Outlook
In addition to interest rates, the BoE maintained its inflation forecast, predicting it will peak at 4 per cent this month before gradually declining to the target of 2 per cent by the second quarter of 2027. The growth forecast for the third quarter has been nudged up slightly from 0.3 per cent to 0.4 per cent.
Bailey cautioned, “Although we expect inflation to return to our 2 per cent target, we’re not out of the woods yet so any future cuts will need to be made gradually and carefully.” This sentiment underscores the cautious approach the Bank is adopting in navigating current economic conditions.
Before the announcement, market expectations indicated only about a one-in-three chance of further rate cuts this year, highlighting the uncertainty that continues to loom over the economic landscape.
