UK Gilt Yields Tumble As BoE Scraps Bond Sales, Holds Rates (As Expected)

The Bank of England decided to keep the bank rate unchanged at 3.75% on Thursday, as broadly expected, but shifted closer to further tightening.

The decision was reached with a 6-3 vote, with Huw Pill, Megan Greene, and Catherine Mann voting to hike.

Although the MPC still sees little evidence of second-round effects in wages and prices, it now judges those risks to have grown and the inflation outlook to be more clearly tilted to the upside.

As UBS notes, several members who voted to hold said the case for raising rates is building if the conflict and energy shock persist.

Cable is weaker…

Additionally, BoE has scrapped plans to sell long-dated gilts as part of a major overhaul of its quantitative tightening program that will see the £488 billion ($650 billion) portfolio unwound by 2034.

Under proposals that have yet to be finalized, the bank will keep £120 billion of gilts that mature in 2049 or later and match them against future banknote issuance.

Another £222 billion that mature by 2035 will be run off and the remaining £146 billion maturing between 2035 and 2049 will be sold at a pace of £20 billion a year, potentially directly to the government through the Debt Management Office.

In a letter to Chancellor of the Exchequer John Healey, BOE Governor Andrew Bailey said the arrangement “preserves the independence of monetary policy” and would “maximize value for money by minimizing cost and risk over the lifetime” of the program.

All planned QT auctions will be paused until April as the terms of sales to the DMO are worked out.

The new approach to QT comes amid criticism of the program, which has accrued £110 billion of losses paid by taxpayers since the unwinding began in 2022.

Gilt yields are down around 10bps on the statement…

A notable theme in the September minutes was the resilience of the UK economy despite tighter financial conditions and higher energy prices. GDP grew 0.4% in Q2, above the BoE’s 0.3% forecast, while July GDP also rose 0.4%.

The Bank’s internal estimate for Q3 growth was upgraded to 0.4% from 0.1% in the July MPR, supported by stronger business-to-business services activity, firmer business confidence and improving consumer sentiment.

In the members’ view on Bank Rate, Governor Bailey warned that the risks to inflation remain to the upside and cautioned against any loss of urgency in reaching negotiated solutions.