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| Bank of England holds interest rates at 4% and slows scheme to sell stock of UK bonds | |
| (32 minutes later) | |
| Move to reduce holdings of government debt could reduce market jitters and Treasury’s borrowing costs | |
| The Bank of England has left interest rates on hold at 4% and will slow the pace of its “quantitative tightening” programme in the year ahead to avoid distorting jittery bond markets that set the cost of government debt. | |
| The central bank’s nine-member monetary policy committee (MPC) voted 7-2 to leave borrowing costs unchanged, after five cuts since summer 2024, including a reduction last month. | The central bank’s nine-member monetary policy committee (MPC) voted 7-2 to leave borrowing costs unchanged, after five cuts since summer 2024, including a reduction last month. |
| The MPC had been widely expected to pause rate cuts this month, with annual inflation running at 3.8% in August, nearly double the target level. | |
| The Bank 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.” | |
| Bank policymakers have been balancing the risks of rising inflation – caused in part by a jump in food prices – against a continuing slowdown in the jobs market, with unemployment at a four-year high. | |
| In the minutes of Thursday’s meeting, the MPC said its own estimates showed employment growth at zero, which it said was “partly attributable to the impact of increases in employers’ national insurance contributions (NICs)”. Reeves’s £25bn NICs increase at last year’s budget sparked a furious backlash from business groups. | In the minutes of Thursday’s meeting, the MPC said its own estimates showed employment growth at zero, which it said was “partly attributable to the impact of increases in employers’ national insurance contributions (NICs)”. Reeves’s £25bn NICs increase at last year’s budget sparked a furious backlash from business groups. |
| Two members of the committee, Swati Dhingra and Prof Alan Taylor, voted for another quarter point rate cut this month. The MPC’s decision to hold rates widens the gulf between its stance and the US Federal Reserve, which reduced interest rates by a quarter of a percentage point on Wednesday, its first rate cut since December. | Two members of the committee, Swati Dhingra and Prof Alan Taylor, voted for another quarter point rate cut this month. The MPC’s decision to hold rates widens the gulf between its stance and the US Federal Reserve, which reduced interest rates by a quarter of a percentage point on Wednesday, its first rate cut since December. |
| Bailey also announced the Bank would slow the pace of reductions to its balance sheet through quantitative tightening (QT), which involves selling off the bonds the Bank accumulated through the emergency policy of quantitative easing (QE) after the 2008 financial crisis. | |
| Threadneedle Street has come under pressure to moderate QT amid volatile yields – effectively the interest rate – on government bonds, known as gilts. | |
| The Bank has acknowledged that QT has put some upward pressure on gilt yields, which affect the cost of borrowing for the Treasury, and critics have accused it of distorting fragile bond markets. Given the gilts are currently being sold at a loss, it also has an impact on the public finances. | |
| In the last year, the Bank has been aiming to reduce its stock of government bonds by £100bn. This has involved selling off gilts, as well as retiring others when they reach maturity. | |
| Thursday’s announcement, which was widely anticipated by markets, saw the Bank promise to cut the planned reduction in its stock for the year ahead to £70bn. | |
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| Bailey said: “Today we reduced the size of our annual QT target from £100bn to £70bn. 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.” | |
| However, with fewer bonds in the Bank’s portfolio set to mature in the next twelve months, the pace of Bank bond sales will actually increase – to approximately £20bn, from the £13bn in the current year. | |
| Pointing to recent volatility in global government bond markets, the minutes of the MPC meeting said, “although the UK gilt market had continued to function in an orderly manner, these factors could pose a risk that QT would have a greater impact on market functioning than previously”. | |
| Rising interest costs on government debt is one of the factors likely to put Reeves on course to bust her fiscal rules, in forecasts from the Office for Budget Responsibility (OBR) ahead of the 26 November budget. | |
| As well as reducing the overall target for QT, the Bank said it would shift the balance of bond sales towards more shorter-term gilts. The OBR recently warned that the decline in defined benefit pensions had undermined demand for the longest-dated government bonds. |