Morning Note: Our take on yesterday's Bank of England rate decision.
Bank of England Interest Rate Decision
On 18 September, the Bank of England (BoE) delivered a widely anticipated decision: it held the Bank Rate steady at 4% but signalled a clear shift in tone through adjustments to its quantitative tightening (QT) programme. The move reflects the BoE’s delicate balancing act between managing inflation that remains stubbornly above target, while being mindful of fragile growth and increasingly volatile gilt markets.
The Monetary Policy Committee (MPC) voted by seven to two to maintain Bank Rate at 4%. Two members, Swati Dhingra and Alan Taylor, wanted a 25 basis point cut to 3.75%, reflecting concerns over weakening domestic demand. The major reasons given for holding rates were persistent inflation, especially in CPI (3.8% in August), elevated wage growth, even though pay pressures are easing somewhat and risks that premature cuts could undermine the disinflation process. The Committee noted that although disinflation has continued over the past two-and-a-half years, progress remains uneven. Of particular concern is that inflation may tick up slightly in September before resuming a downward trajectory toward the 2% target, though only over the medium term.
Perhaps the more significant development was the decision to slow the pace at which the BoE reduces its stock of government bonds held for monetary policy purposes. Previously, the QT programme had targeted a reduction of £100bn over the prior year; going forward, that annual pace will be reduced to £70bn, bringing the overall stock down to about £488bn over the next 12 months. Alongside this, the BoE will skew gilt sales away from long-dated bonds: roughly 40% short-term, 40% medium-term, and just 20% long-term in initial proceeds. This marks a response to strain in the gilt market, especially at longer maturities where yields have been elevated, potentially increasing debt servicing costs and straining fiscal planning.
Governor Andrew Bailey emphasised that while inflation is expected to decline, the bank is “not out of the woods yet.” He cautioned that future rate cuts, while likely, are far from assured: timing and scale will remain data-dependent. The Governor also noted that financial conditions have tightened somewhat recently. Market pricing for short-term interest rates has shifted upward, gilt yields at the long-end have risen, and there is more risk premium priced in. These developments, he suggested, mean any easing must be pursued cautiously.
Market reactions were mixed. Gilt yields, especially for long maturities, eased slightly immediately after the announcement as responders welcomed the slower pace of QT, which relieves upward pressure on yields. The short-end rates remained stable, reflecting the consensus that the Bank Rate is unlikely to be cut again imminently. Sterling weakened modestly against the dollar, as investors weighed the risk that domestic inflation and fiscal pressures could limit room for future cuts. Analysts in fixed income noted that trimming back QT may moderate but not reverse recent volatility in the gilt market. Equity markets showed some relief in domestically sensitive sectors, though broader market gains were tempered by global yield pressures and concerns about weak business investment.
The BoE’s Inflation Report updated forecast shows inflation is expected to peak at around 4% in September, before gradually declining toward the 2% target in mid-2027. GDP forecasts were nudged up slightly for Q3, from 0.3% to 0.4%, though growth is still judged to be subdued overall. The minutes emphasised downside risks to growth; domestic demand is soft, business investment remains weak, and geopolitical or global trade policy shocks are possible. However, the Report also warned that inflation expectations and wage pressures could resurface.
The BoE’s decision represents a cautious pivot rather than a break. Rates remain unchanged, but policy tightening via QT is being reined in and tilted away from long-dated government debt. The Committee appears to believe that inflation is coming under control but remains wary of over-eagerness in easing. The November Budget now looms large as another possible inflection point.
Other Market News
The Bank of Japan surprised markets by announcing a plan to start unloading its massive ETF holdings, pledging to sell about Y620bn ($4.2bn) per year. Policymakers voted 7-2 to keep rates unchanged at 0.5%. The Nikkei 225 slid by 0.6% and the yen edged higher. Ten-year JGB yields climbed as traders started to price in the possibility of a rate hike in October, according to MLIV. Elsewhere in Asia this morning, other equity market were little changed: Hang Seng (-0.1%); Shanghai Composite (+0.1%).
Donald Trump and Xi Jinping will speak at 9 a.m. Washington time in their first direct engagement since June. The meeting promises to determine the fate of TikTok and potentially ease trade tensions between the two nations.
Nvidia is to invest $5bn in Intel, throwing its heft behind the struggling US chipmaker. It comes just weeks after the White House engineered an extraordinary deal for the US government to take a massive stake in the company. The deal will make NVIDIA one of Intel's largest shareholders. Nvidia’s support represents a new opening for Intel after years of turnaround efforts. It also triggered a 23% jump in the chipmaker’s shares.
10-year Treasury yields ticked up to 4.13%, climbing almost 10 basis points over the past two sessions, following the Federal Reserve signalled a less dovish stance than markets expected. Gold trades at $3,645 an ounce. Brent Crude slipped to $67 a barrel as renewed calls from US President Donald Trump for lower prices tempered supply concerns.
The FTSE 100 is currently 0.2% lower at 9,220. Croda continued its recent rally following the disclosure of a 5% stake by a US investor. Sterling weakened to $1.3495 and €1.1470. The UK budget deficit widened more than expected to £18bn in August, while retail sales rose more than estimated. According to GfK, Britons are saving less as the cost-of-living surges, with a plunge in savings intentions and overall consumer confidence.
Source: Bloomberg
