Bank of England set to slow tightening

The Bank of England is expected to ease its pace of quantitative tightening while leaving interest rates unchanged at 4 per cent. The move comes as policymakers seek to reduce volatility in bond markets without loosening their fight against persistent inflation.

According to reports ahead of Thursday’s Monetary Policy Committee (MPC) decision, the Bank is preparing to scale back gilt sales from around £100 billion a year to £67.5 billion. Some economists believe the figure could fall further, closer to £60 billion. The central bank is also weighing whether to concentrate its disposals in shorter-dated securities, avoiding pressure on longer-term yields.

The decision reflects concern over recent movements in gilt markets. Yields on 20- and 30-year UK government bonds have climbed sharply in recent months, raising borrowing costs for the Treasury and private sector alike. Analysts suggest that while quantitative tightening contributes only modestly to those increases — between 0.15 and 0.25 percentage points, according to the Bank’s estimates — investors have grown wary of the pace and composition of sales.

Inflation remains the central challenge. UK consumer price inflation stood at 3.8 per cent in August, nearly double the Bank’s 2 per cent target. Policymakers have signalled that rates will remain high for longer, with Governor Andrew Bailey cautioning that “considerably more doubt” surrounds the timing of any future cuts.

Market forecasts have shifted as a result. While economists previously expected a rate reduction before the end of 2025, consensus is softening, with some predicting that the first cut may not arrive until early next year. The outcome of November’s UK Budget may also influence the pace of monetary easing, with fiscal policy and borrowing costs under close scrutiny.

The MPC’s September decision will be watched closely by investors seeking clarity on how far the Bank intends to go in rebalancing its balance sheet while maintaining credibility in its inflation fight. A reduced pace of quantitative tightening would still represent a substantial withdrawal of stimulus, but one calibrated to avoid undue pressure on gilt markets.