The Bank of England held Bank Rate at 3.75% on Thursday but signalled it may need to raise it as the Middle East energy crisis pushes up inflation. At the same time, it overhauled its gilt-selling programme, permanently retaining £120 billion of bonds and slowing the pace of sales — a move that pulled long-dated borrowing costs lower.
Britain's central bank gave its clearest signal yet that interest rates will need to rise, even as it eased the pace of its gilt sales and sent long-term borrowing costs lower.
Six-three vote masks a hawkish tilt
The Monetary Policy Committee voted six to three to hold Bank Rate at 3.75%, with three members — Megan Greene, Catherine Mann and chief economist Huw Pill — pushing for an immediate quarter-point rise. Governor Andrew Bailey said: "policy may have to tighten", according to the Financial Times, as inflation is forecast to head above 4% next year. The decision came a day after data showed inflation rose to 3.1% in August, well above the Bank's 2% target.
Gilt-sale pace cut by a third
The Bank will permanently keep £120 billion of gilts on its books as backing for sterling banknotes, while selling off the rest over the next eight years. Under the new plan, annual sales will run at about £46 billion — £20 billion of active sales plus roughly £26 billion of maturing debt — down from £70 billion previously. The Bank's total gilt holdings have already fallen from a peak of £895 billion in 2022 to £488 billion now.
Treasury talks could redirect future sales
The Bank is also weighing whether to sell its remaining gilts directly back to the Treasury rather than to the open market, and it will pause active sales until the idea is signed off by chancellor John Healey. Until then, the Bank will hold off on further disposals as the two sides work out the mechanics of the arrangement.
Long yields fall as markets eye November
Long-dated borrowing costs fell after the announcement, with the 30-year gilt yield down 0.12 percentage points to 5.74%, putting the market on track for its best day since May. Bailey's signalling implied that a rate rise could come as soon as the Bank's November meeting.
Sources: Financial Times, The Guardian
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