BoE holds interest rates at 4% and slows ‘quantitative tightening’

{"text":[[{"start":null,"text":"

"}],[{"start":10.45,"text":"The Bank of England kept interest rates at 4 per cent on Thursday and slowed the pace of reductions to its balance sheet, as it blamed the UK’s Labour government for contributing to recent increases in inflation."}],[{"start":25.6,"text":"The seven-to-two decision to hold rates steady was in line with market expectations, as was the bank’s decision to dial back its quantitative tightening bond-selling programme from £100bn to £70bn to curb rising bond yields."}],[{"start":43.1,"text":"The bank’s Monetary Policy Committee also signalled it would not hurry to cut interest rates again, signalling concern about continuing inflationary pressures."}],[{"start":54.78,"text":"In a departure from its language last month, the MPC warned that “upside risks around medium-term inflationary pressures remain prominent in the Committee’s assessment of the outlook”."}],[{"start":71.58,"text":"Andrew Bailey, the BoE governor, also suggested that government policies were partly to blame for the recent rises in inflation. In a letter to UK chancellor Rachel Reeves, he said that efforts to contain rising labour costs “appear to have been delayed” by higher payroll taxes and a jump in the minimum wage."}],[{"start":95.33,"text":"Bailey added that the new QT target meant that 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 the gilt market conditions”."}],[{"start":110.77,"text":"Reeves welcomed the move on QT in a letter to Bailey, adding that it was important “that the bank continues to liaise closely with the Debt Management Office to ensure the bank’s operations do not impact on the government’s wider gilt issuance strategy”."}],[{"start":128.66,"text":"The BoE’s plans imply £21bn of active bond sales in the coming year, with the remainder of the balance sheet run-off occurring naturally as securities mature."}],[{"start":141.41,"text":"Although the BoE is now shrinking its balance sheet more slowly, the plan represents an acceleration in active bond sales compared with the previous 12 months, when there were only £13bn of sales."}],[{"start":156.04,"text":"That is because a smaller quantity of gilts in the BoE’s portfolio are set to mature in the coming year, compared with the previous 12 months."}],[{"start":165.84,"text":"The BoE added that just 20 per cent of its sales would be long-dated bonds, which have been the focus of this year’s sell-off, compared with a third previously."}],[{"start":177.88,"text":"The MPC vote to dial back QT from the previous £100bn-a-year pace was split, with two dissenters."}],[{"start":186.53,"text":"Catherine Mann, an external MPC member, preferred to slow the pace of reduction to £62bn, while chief economist Huw Pill preferred to shrink the balance sheet by £100bn, in line with the previous year."}],[{"start":202.52,"text":"The agreed £70bn pace will bring the BoE’s gilt holdings to £488bn by September 2026, the BoE said."}],[{"start":213.75,"text":"The central bank expanded its balance sheet to support the economy in waves of bond-buying starting in 2009 during the financial crisis. Holdings of UK government debt peaked in 2022 at £875bn and have since been pared back steadily."}],[{"start":234.54,"text":"The UK’s 30-year gilt yield showed little initial reaction to the QT reduction, which was close to market expectations. It later rose 0.07 percentage points to 5.5 per cent amid broader weakness in bond markets."}],[{"start":253.22,"text":"The BoE said that its bond-selling programme could present a “greater impact on market functioning than previously”, given the backdrop of a global bond market sell-off in recent months."}],[{"start":266.8,"text":"Mike Riddell, fund manager at Fidelity International, said the market reaction to the QT announcement “indicates it’s almost bang on consensus”."}],[{"start":277.38,"text":"Thirty-year yields have fallen back from hitting their highest since 1998 at 5.75 per cent earlier this month. Yields move inversely to prices."}],[{"start":289.76,"text":"Gilt investors have urged the BoE to slow its bond sales, arguing that they are helping to push long-term bond prices down and yields up."}],[{"start":300.81,"text":"The BoE’s decision is particularly sensitive since Reeves faces a hole in the public finances ahead of her November Budget. Higher market interest rates feed through to higher debt service payments."}],[{"start":315.6,"text":"Tomasz Wieladek, chief European macro strategist at T Rowe Price, said the BoE had met market expectations “as close as humanely possible, clearly in line with its don’t rock the boat philosophy on asset sales”."}],[{"start":332.24,"text":"He added: “This approach allows the bank to clearly demonstrate that its decisions are independent of fiscal policy . . . but at the same time show that it is sensitive to gilt market volatility.”"}],[{"start":346.53000000000003,"text":"Bailey said the BoE was “not out of the woods yet” when it comes to its efforts to push inflation back to target, adding that “any future [rate] cuts will need to be made gradually and carefully”."}],[{"start":358.21000000000004,"text":"Reeves added in her letter that inflation remains “too high” and that the Cabinet had been instructed to take further action paring back inflation ahead of the Budget."}],[{"start":370.91,"text":"Inflation stayed at 3.8 per cent in August, far above the BoE’s 2 per cent target, official figures showed this week."}],[{"start":379.74,"text":"But two MPC members — Swati Dhingra and Alan Taylor — opposed the decision to keep the BoE’s key rate unchanged at 4 per cent, calling for a quarter-point reduction given concerns about the strength of the economy."}],[{"start":397.14,"text":"Growth has slowed, with the economy expanding 0.2 per cent in the three months to July."}],[{"start":412.71,"text":""}]],"url":"https://audio.ftmailbox.cn/album/a_1758246835_6865.mp3"}