Global: Bank of England Poised to Slow Quantitative Tightening, Hold Interest Rates

The Bank of England (BoE) is expected this week to scale back the pace of its £100 billion-a-year quantitative tightening (QT) programme, while maintaining interest rates at current levels. The move comes amid heightened bond market volatility and growing scrutiny of the central bank’s balance sheet strategy.

The BoE remains the only major central bank actively selling government bonds outright, rather than relying solely on maturities to unwind quantitative easing (QE). Since 2022, its gilt holdings have fallen from £875 billion to £558 billion, with sales averaging £100 billion annually.

Although the central bank maintains that QT has had only a modest impact—adding an estimated 0.15 to 0.25 percentage points to borrowing costs—markets remain sensitive. Long-dated gilt yields hit their highest levels since 1998 earlier this month, pushing up financing costs for the government ahead of the November budget.

A Reuters poll of economists suggests the Monetary Policy Committee may reduce annual sales to around £67.5 billion, a sharper slowdown than the BoE’s own August projection of £72 billion. Some analysts believe the Bank could halt sales of longer-dated bonds, which have seen the steepest price declines, to ease market pressure.

Despite these concerns, economists caution against the appearance of political influence. “Continuing QT would demonstrate independence and reinforce credibility in tackling inflation,” said Adam Dent, chief UK rates strategist at Santander CIB.

Inflation remains a pressing challenge. At 3.8% in July, the UK recorded the highest rate among G7 economies, and the BoE expects inflation to climb to 4% this month. While the central bank has already cut rates five times in just over a year, policymakers voted 5–4 in favour of the most recent reduction, highlighting divisions within the committee.

By contrast, the U.S. Federal Reserve is widely expected to deliver two more rate cuts this year, while the European Central Bank is seen as having paused for the cycle.

Governor Andrew Bailey has cautioned that the outlook for further UK rate cuts is uncertain, noting there is “considerably more doubt about exactly when and how quickly” reductions could continue. Market pricing currently reflects limited expectations for another cut before April 2026, though most economists polled by Reuters still anticipate at least one further reduction by year-end.

Analysts argue that weak growth, a softening labour market, and higher taxes could soon ease inflationary pressures. “The assumption that the BoE will cut rates only once or twice more implies a stronger demand outlook than we see,” said Bill Papadakis, strategist at Lombard Odier, who forecasts materially lower rates ahead.