The Bank of England plans to slow its bond sales while maintaining interest rates at 4%, as inflation and bond yields remain elevated. A decision at the Thursday meeting is anticipated to keep rates steady, with policymakers likely voting 7–2, following a recent close 5–4 vote to cut rates.
Markets expect the annual pace of gilt sales to drop from £100 billion to approximately £67.5 billion. Some forecasts suggest a further reduction to £60 billion or a shift towards shorter-dated bonds. Though the Bank of England minimises the impact of quantitative tightening on borrowing costs, some argue it has increased volatility and driven up long-dated gilt yields.
Uk Inflation And Borrowing Costs
The UK experiences the highest rates of inflation and government borrowing costs in the G7, with price growth at 3.8% in August, almost double the central bank’s target. The Bank forecasts inflation to peak at 4% before gradually returning to target by mid-2027. Governor Andrew Bailey stated there is uncertainty about the pace of future rate cuts.
Futures markets currently suggest a 30% likelihood of another cut this year, though economists predict possible reductions in the coming months. A larger-than-expected slowdown in quantitative tightening may reduce gilt yields, while sterling could strengthen if a hawkish tone is adopted. The Bank of England’s announcement is scheduled for 1100 GMT.
With the Bank of England holding rates at 4%, we see a tricky situation for the weeks ahead. Inflation is stuck at 3.8%, nearly double the goal, which makes the Bank hesitant to cut rates further even with pressure to do so. This level of inflation, while high, is a significant drop from the peaks of over 10% that we saw back in 2023, but it remains the highest in the G7.
The main event for bond traders is the expected slowdown in gilt sales, from £100 billion to around £67.5 billion. We should consider using gilt futures to bet on an even larger slowdown, perhaps to £60 billion, which would likely cause bond prices to rise. The UK bond market is very sensitive to these changes, something we remember all too well from the volatility in late 2022 when 10-year gilt yields shot above 4.5%.
The Bank Of Englands Stance On Inflation
For currency traders, the key is the Bank’s tone. If policymakers sound tough on inflation despite holding rates, Sterling could strengthen, and we should look at call options on GBP/USD to capture this potential upside with limited risk. The futures market is only pricing a 30% chance of another rate cut this year, suggesting that a firm stance from the Bank is becoming the base case.
Given the uncertainty over future rate cuts, we can also look at SONIA futures for early 2026. If we believe the Bank will stay on hold longer than expected due to sticky inflation, betting against rate cuts for that period could be profitable. We have already seen rates come down from the 5.25% peak in 2023, and officials now seem content to wait and see if their previous actions are enough.
