MNI BOE WATCH: Seen Slowing QT And Holding Policy Rate

The Bank of England is widely expected to leave its policy rate unchanged at 4.0% at its September meeting and to keep its guidance intact while voting to ease back on gilt sales.

The Monetary Policy Committee only cut by 25 basis points in August by the narrowest of margins, with four of nine members voting for no change. Given that the committee's guidance also advocates "a gradual and careful approach to the further withdrawal of monetary policy restraint", the chances of August cut’s being immediately followed by another in September look slim to non-existent.

Market interest will focus on the split in the vote, on how the MPC interprets recent data with signs of sticky inflation and fresh labour market loosening, and on its approach to quantitative tightening. In September 2024 the MPC voted to reduce the stock of gilts by GBP100 billion over the next 12 months and this time round analysts expect it to slow sales, with expectations spread across a range from the low GBP60 billions to mid GBP70 billions.

Over the last year, the gilts reduction has included GPB87 billion of maturing bonds,  but only GBP 49 billion are due to mature over the next 12-month-period. The rest of the reduction will come in active sales.

Some research has indicated that the effects of gilt sales on yields may not be as minimal as Bank officials have previously claimed, with their previous view that QT should be like "watching paint dry" under scrutiny. (See MNI INTERVIEW: QT Raises Yields, BOE To Slow Sales- RF's Smith )

With the long end of the gilt curve under stress, as buyers dry up in part due to the demise of defined-benefit pension schemes, the Bank is also widely expected to ditch its approach of reducing its asset holding "as evenly as possible across maturity sectors," and to cut back or even axe long dated sales altogether. (See MNI INTERVIEW:  BOE To Cut Long Gilt Sales - Ex-MPC's Saunders)

The MPC vote split will, as ever, be in the spotlight with the most common view that it will be seven-two for no change, with independent members Swati Dhingra and Alan Taylor, who have both highlighted the fragility of economic activity rather than inflation persistence, voting for a 25bp cut. Taylor initially backed a 50bp cut in August.