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 government bond markets.
The central bank’s nine-member monetary policy committee 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 as annual inflation remained at 3.8% in August, nearly double the target level.
The Bank’s 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”. The £25bn NICs increase at last year’s budget prompted 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 that of the US Federal Reserve, which reduced interest rates by a quarter of a point on Wednesday, its first rate cut since December.
Bailey also announced that the Bank would slow the pace of reductions to its balance sheet through quantitative tightening (QT), which involves selling off the government bonds the Bank accumulated through the emergency policy of quantitative easing 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 now being sold at a loss, the policy also has an impact on the public finances.
In the past 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.
In Thursday’s announcement, which was widely anticipated by markets, the Bank opted to cut the planned reduction in its stock for the year ahead to £70bn.
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 12 months, the pace of Bank bond sales will actually increase, to about £21bn, from £13bn in the current year.
Pointing to recent volatility in global government bond markets, the minutes of the MPC meeting said that “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”.
The chancellor, Rachel Reeves, welcomed the Bank’s decision, adding that it should continue to liaise with the Debt Management Office, which issues government debt, “to ensure the Bank’s operations do not impact on the government’s wider gilt issuance strategy”.
Rising interest costs on government debt are one of the factors likely to put her on course to break her fiscal rules, in forecasts from the Office for Budget Responsibility before 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 shorter-term gilts. The OBR recently warned that the decline in defined-benefit pensions had undermined demand for the longest-dated government bonds.
