UK government borrowing costs fall as Bank of England outlines new bond-selling plan – as it happened

Time to wrap up… The Bank of England has kept interest rates on hold as it warned a continuation of the bitter fighting in the Middle East could force it to raise borrowing costs amid mounting fears over inflation. It also announced a surprise plan to sell billions of pounds in UK government bonds back to the Treasury to avoid fuelling turbulence in the gilt market, a decision that could have significant consequences for the public finances before next month’s budget. As the fallout from war in the Middle East fuels a rise in energy prices, the Bank’s monetary policy committee (MPC) voted by a majority of six to three to keep its base rate unchanged at 3.75%. However, the Bank said the increasingly probable prospect of a lengthy war fanning intense volatility in global markets had dramatically raised the chance of it putting up borrowing costs in future. Andrew Bailey, the Bank’s governor, said: “So far higher global energy costs have had a limited effect on price and wage setting in the UK. “But the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise [the] Bank rate to ensure that inflation falls back to our 2% target.” Against a volatile backdrop in global financial markets, Threadneedle Street also announced updated proposals for the winding down of its financial crisis-era quantitative easing programme, which had involved the buying of £895bn of UK government bonds at its peak. In a surprise move, the Bank said it planned to sell £146bn of bonds to the Treasury, at a pace of about £20bn a year until 2034, in a plan that would require signoff from the chancellor, John Healey, next April. The Treasury’s Debt Management Office (DMO) would then sell bonds to cover the government’s financing commitments, including this buyback. The rationale is that the Bank holds long-term bonds where investor demand is dwindling, whereas the DMO would have the capacity to cover the buyback by issuing shorter-term debt. Here’s the full story: City investors appear to have welcomed the Bank’s plan to wind down its asset purchase scheme. The yield, or interest rate, on UK government debt has dropped – 30-year bond yields are on track for their biggest one-day fall since 20 May. Several economists have predicted the Bank could raise interest rates at its next meeting in November, unless progress towards ending the Iran war pushes down energy prices. The duration of the Iran War will be the main factor determining whether the Bank of England raises interest rates this year, say analysts at Nomura. They predict the Bank will not raise rates this year – which is more dovish than the wider market, which is pricing in 38 basis points of hikes (ie, at least one quarter-point rise) by the end of the year. Nomura explain: Overall, the duration of the Iran war so far (alongside other external price pressures such as hot weather and AI) means that the MPC is moving closer to voting for a hike. However, if energy prices fall back, and evidence of second-round effects does not emerge (policymakers noted today that pass-through of energy prices has been slower than expected), we think the majority of the committee would likely still prefer unchanged rates for the rest of the year. The main deciding factor between if we are right in our view of unchanged rates this year, or if markets are correct, will be what happens to energy prices. The EU and China are continuing efforts to avert a trade war after an hour long call between EU trade commissioner Maros Sefcovic and his Chinese counterpart Wang Wengtao. The EU reiterated the need to move from “rhetoric to results” with a “credible” solution that will curb China’s growing €1bn a day surplus in trade with the bloc. Extensive work mapping the potential safeguards including quotas and price floors and possible retaliatory measures by the Chines have already been carried out in advance of Sefcovic’s planned meeting with Wang on October 8. A spokesperson said the call lasted more than an hour and took stock of the the work carried out by officials so far covering the management of Chinese exports to the EU, the EU’s access to the Chinese market and export controls on rare earths. Restrictions on exports of rare earths were imposed by Beijing in April 2025 but were suspended for a year last November after Donald Trump’s meeting with Xi Xingping in Korea last October. Experts expect that suspension to continue after the Trump Xi summit next week in Washington but the EU will be pushing for a crave out for the bloc. The EU’s deputy chief spokesperson Olof Gill says: “While genuine engagement remains a priority, it is equally important that first concrete outcomes are delivered at the second session of the Trade and Investment Council in Beijing in Cotober which the commissioner will co-chair - a signal that we are moving from rhetoric to results. “That outcome needs to be credible.” Chancellor John Healey has revealed how the Bank of England’s bright idea to sell its bond holdings back to the government would work in practice. In a letter to Andrew Bailey today, Healey says: As you note in your letter, officials have been developing a model whereby all APF active gilt sales are conducted to the government and not to the market. HM Treasury would instruct the DMO via the Debt Management Account to purchase the APF gilts that the Bank Executive is selling in its implementation of the MPC’s multi-year plan. Sales would be conducted at market prices and in a pre-defined manner, pre-announced by the Bank Executive, with the remaining gilts continuing to be held by the APF to maturity. The DMO would subsequently on-sell the gilts to the National Loans Fund for cancellation. The indemnity arrangements between HM Treasury and the Bank would continue unchanged. HM Treasury would in due course instruct the DMO to issue a corresponding amount of debt to finance such APF purchases through the annual financing remit. This sales model, whilst leaving the overall supply of gilts to the market from the public sector unchanged, would see a return to a single public sector supplier of gilts to the market. Such an arrangement, along with the MPC’s multi-year path of QT and the confirmation that the longest-dated APF gilts will be held in the APF to indirectly back banknotes, would also support the principle of predictability, whilst continuing to uphold the independence of the MPC The Bank of England are also warning that UK energy bills are set to rise next year. It points out that Ofgem’s headline energy price cap for October to December will increase to £1,723, somewhat higher than it expected in July. The cap was now expected to “rise substantially further in 2027 Q1, all else equal”, it adds. The Bank of England has prepared the ground to raise interest rates after its next meeting, on 5 November, predicts Berenberg economist Andrew Wishart. He has scrutinised the minutes of this week’s meeting (online here) , and spotted that fourof the six policymakers who voted to hold rates today have hinted that they coud support a rate rise in future. They are: Despite emphasising weak economic conditions again, Governor Andrew Bailey said that “it is likely policy may have to tighten” if the war goes on, Sarah Breeden said that, if inflation risks crystallise, it will become “increasingly appropriate for Bank Rate to respond”, Clare Lombardelli said that, if the conflict continues, “the case for raising Bank Rate is building”, And Dave Ramsden added that “were upside pressures on the inflation outlook to continue to build, there could be a case for increasing bank rate”. Professor Costas Milas of the University of Liverpool is intrigued by the Bank’s decision to pause active QT (sales of government bonds) for six months. He tells us: This suggests to me the BoE is worried about persistent market volatility related to the U.S. mid-term elections plus the geopolitical risk linked to the war in Iran. It also suggests to me the MPC members are currently thinking that the impact of QT on yields is in fact higher than the 20-30 basis points reported in July’s Monetary Policy Report but are “shy” to state this directly. My BoE Staff Working Paper (jointly with Michael Ellington, University of Liverpool, and Ryland Thomas, BoE) points to a 40 basis points impact of QT on UK yields, so I am tempted to conclude our estimated impact is more “aligned” with reality than the MPC’s thinking! If energy prices don’t cool down soon, the Bank of England will “reluctantly hike rates in November and probably in February too”, predicts ING. They told clients: The Bank of England has voted 6-3 in favour of keeping rates on hold at 3.75%, but the overriding message is clear: it is prepared to hike interest rates if energy prices stay high. The chances of a November hike hinge entirely on whether oil and natural gas prices come lower. Rufaro Chiriseri, head of fixed income at RBC Wealth Management, has a pithy take on today’s Bank of England decisions: “A 6-3 hold masks a split. Three members voted to hike, with several ‘neutral’ voters signalling openness to tightening if energy prices persist or second-round effects emerge. However, the overall dovish sentiment dominated, and markets are paring back Bank Rate expectations in a year’s time from peaks of 4.88% last week to 4.70% today – a level we think is still too high. The QT pace came in at £46bn annually, which is slightly below the £50bn consensus forecast. More importantly, the Bank will halt long-dated gilt sales by setting aside £120bn for banknote backing. Markets welcomed this new QT approach, and the long-end is outperforming, with 30-year yields down 11bps.” The Bank of England is also warning that inflation is set to rise through the rest of this year, and in early 2027. Based on energy prices as at close of business on 14 September, CPI inflation was expected to increase to around 3.75% in 2026 Q4, compared with 3.2% at the time of the July Report, and to reach slightly above 4% in 2027 Q1. Economics commentator Chris Giles argues that today’s decision to unwind quantatitive easing completely is “NOT something to get worked up by, however tempting”. He’s made some interesting points about today’s decision to slow the pace of quantitative tightening, and the suggestion that bonds could be sold back to the government, on a BlueSky thread – here are some of them: It is marginally bad for the current budget rule and marginally good for the debt rule. Marginally is the operative word here. Having DMO do sales to the market is also marginal. It always set the marturity structure of issuance after knowing the BoE sales, so was always in charge. This formallises the practice There is a tiny benefit to the public purse from BoE not selling small quantities of illiquid bonds UK gilt market likes it - but let’s not get too excited by a 10bp move in the 30-year yield. That way madness lies The pause in sales until April suggests that despite working on this for a year and despite many outsiders suggesting similar stuff, UK authorities can’t take decisions quickly The Bank has also decided to pause its bond sales for six months. Reuters has the details: The BoE will also pause all sales until April while it consults with the government on selling gilts direct to the finance ministry’s Debt Management Office at market prices, rather than holding its own auctions. This shift would potentially help avoid getting bad prices at auctions for small residual amounts of gilt. Government borrowing costs are falling, after the Bank of England announced a slowdown in the pace of its bond sales programme. The yield, or interest rate, on short and long-dated bonds have both dropped today. 10-year bond yields are down 6 basis points (0.06 of a percentage point), at 5.23%, away from the 19-year highs seen earlier this week. 30-year bond yields are down 7bps at 5.79% – having hit their highest level since 1997 a few days ago. Investors may be relieved that the Bank is keen to sell some of its bond holdings back to the government (see last post), rather than trying to flog ‘em back to investors in the bond market. If ministers agree to this proposal, it would remove some of the pressure that has pushed up bond yields and also cut the losses being incurred by taxpayers…. Excitingly, the Bank of England is considering selling some of the UK government bonds it owns back to the UK government! The Bank says it believes some of its bond holdings will “likely become less aligned with market demand” as it unwinds its asset purchases under the plan laid out at noon (see earlier post). It is considering a solution of selling gilts back to the Treasury, rather than to bond investors – and reveals there has been a “robust discussion” about this issue. As flagged earlier, the Bank is planning to sell £146bn of gilts as part of its QT programme. The remaining £222bn will be run down “passively” (ie, the Bank will wait until they mature). No final decision has been made yet. The Bank says: With regard to this issue, the Committee considered important institutional questions regarding the potential interaction between monetary and fiscal actions and the independence of MPC decision-making over monetary policy. This led to a robust discussion around the balance of costs and benefits within the wider package of measures announced in relation to the Bank’s implementation of QT. As we saw back in July, there’s a majority of six Bank of England policymakers who are reluctant to raise interest rates. The Bank says: Six members (Andrew Bailey, Sarah Breeden, Swati Dhingra, Clare Lombardelli, Dave Ramsden and Alan Taylor) preferred to maintain Bank Rate at 3.75% at this meeting. These members were concerned about recent developments in a range of energy prices and their impact on holding CPI inflation above target for longer than had been previously expected. Domestic activity and tight financial conditions were restraining inflationary pressures, but the risk of second-round effects was growing in the absence of a lasting resolution of the conflict. Two members in this group (Swati Dhingra and Alan Taylor) acknowledged these risks, but placed particular weight on the role of slack in moderating inflation, evidence of restrained pass-through of costs to prices, and the restrictive level of Bank Rate, all of which would allow more time to observe further evidence. Three hawkish members of the Bank’s monetary policy committee cited the scramble to roll out artificial intelligence infrastructure, and El Niño, as reasons for hiking interest rates today. The minutes of this week’s meeting say: Three members (Megan Greene, Catherine L Mann and Huw Pill) preferred a 0.25 percentage point increase in Bank Rate at this meeting. These members noted that the escalation and duration of the Middle East conflict continued to raise energy and food prices. Global factors such as AI supply constraints and El Niño would provide inflationary pressure as well. A projected surge in inflation would peak in early 2027, just as wage settlements were agreed. On the decision to slow the Bank’s bond sales, BoE governor Andrew Bailey says: “Today we provided clarity over the future of our quantitative tightening policy. “The Monetary Policy Committee and Bank have decided to withhold a substantial part of the stock of gilts held for monetary policy purposes while the remainder will be unwound over the next eight years.” The Bank of England has also voted to slow the pace of its bond selling programme, as well as leaving interest rates on hold. At this week’s meeting, the Bank’s monetary policy committee has decided to unwind its quantitative tightening programme at an annual average pace of £46bn by the end of 2034. That will be conducted through annual sales of £20bn, plus £26bn per year of gilts which mature. That’s down from a previous QT pace of £70bn, and a slightly larger slowdown than expected (the City had expected QT to be slowed to £50bn). Today’s decision follows criticism that QT has been pushing up government borrowing costs, because the Bank’s sale of gilts increases the yield on government debt. The Bank also makes a loss on the sale, which lands on the taxpayer. The Bank currently holds £488bn of gilts through its asset purchase programme (created after the financial crisis), which bought debt with newly created money. It has decided to set aside £120bn of bonds to back the issuance of banknotes, and wind down the remaining £368bn by the end of 2034. Newsflash: The Bank of England has left UK interest rates on hold today, in a relief for borrowers. The Bank’s monetary policy commmittee has voted to maintain Bank rate at 3.75%, a decision expected by the financial markets. The Bank says: At its meeting ending on 16 September 2026, the Monetary Policy Committee (MPC) voted by a majority of 6–3 to maintain Bank Rate at 3.75%. Three members voted to increase Bank Rate by 0.25 percentage points, to 4%. More to follow…. Anything other than a hold from the Bank of England today would still be a surprise. The money markets indicate there’s a 76.5% chance of ‘no change’ from the Bank’s monetary policy committee, and just a 23.5% chance of a rise in interest rates. Tension is creeping up in the City as investors anticipate the Bank of England’s interest rate decision at noon. The Bank is still expected to leave rates on hold, in a split vote – a minority of policymakers expected to argue for a rate hike to cool inflation. Raffi Boyadjian, lead market analyst at Trading Point, says: With the Fed decision out of the way and fewer headlines out of the Middle East this week, the focus is now on the Bank of England. Although the UK central bank is not expected to raise rates today, policymakers will likely feel emboldened by the Fed and strike a more hawkish tone, potentially flagging a hike in November. The pound is steadier today following the post-Fed slide, trading around $1.3385. Ouch! UK mortgage rate have jumped sharply today, as the recent increase in government bond yields prompts lender to hike borrowing costs. Data provider Moneyfacts has calculated that the average 5-year fixed residential mortgage rate has jumped to 5.87% today. That’s up from 5.81% yesterday, and the highest rate since 6 November 2023. The average 2-year fixed residential mortgage rate today has risen too, to 5.83%, up from 5.76% on Wednesday. Some good news from the eurozone – inflation is not quite as high as first thought. Consumer prices across the euro area rose by 3.2% in the year to August, according to a new estimate from eurostat. It had initially estimated inflation rose to 3.3% in August. That’s still a rise from July, when prices rose at an annual rate of 2.9%. The lowest annual rates were registered in Sweden (0.3%), Estonia (1.3%) and Czechia (1.5%). The highest annual rates were recorded in Romania (6.3%), Lithuania (5.6%) and Cyprus (5.2%). The ONS appears to have partly solved the UK’s productivity puzzle. That puzzle is why UK output per hour after 2008 only grew at a much slower rate than would have been expected from the pre-GFC trend. The answer, is that Britons have not been working as many hours as the ONS estimated. It now estimates that total actual hours worked in 2024 were 11.1% above their 1997 to 2007 average – it had previously estimated growth of 18.5%. The ONS says: Under the component approach, improvements to actual hours worked can explain half of the productivity slowdown. The “productivity puzzle” therefore remains under both approaches, but it is smaller under the component approach framework. The component approach does not remove the post-GFC slowdown, but it suggests that part of the measured shortfall reflects labour input measurement, particularly the treatment of average actual hours worked. This looks to be the key finding from the Office for National Statistics’s new report into UK productivity: It shows that under the ONS’s new approach, UK productivity is closer to its trend line before the global financial crisis (GFC) rocked the economy. In other worse, Britain’s productivity crisis has not been as severe as feared. One factor is that the ONS now believes the downward trend in average hours worked continued after the GFC (better late then never, I suppose!) The ONS says: Under the component approach, the distinction between the pre- and post-GFC trends are less pronounced. Growth still slows after the financial downturn, but the post-GFC trend lies closer to the earlier trajectory than under the current approach. Component output per hour also shows stronger post-crisis growth, increasing by 1.3% a year between 2009 and 2019, compared with 2.0% a year between 1997 and 2007. Newsflash: Britain’s economy has been more productive since Tony Blair’s first election win than previously thought. A new measure of measuring productivity, just released by the Office for National Statistics, shows that annual productivity growth since 1997 has been stronger than it had estimated in the past. The ONS now believes that output per hour was 40.7% higher in 2024 than in 1997 under its new “component approach”, compared with 34.0% under the previous methodology. This implies annual productivity growth of 1.3% since 1997, compared with 1.1% under the current approach (which is based on the ONS’s shonky Labour Force Survey). The new “component” approach introduces explicit adjustments for annual leave, sickness, bank holidays, furlough and overtime, while benchmarking hours worked to employer-reported data; it will replace existing UK labour productivity statistics, the ONS says. Interestingly, the new approach shows that between 2009 and 2019, output per hour worked has grown faster than previously estimated. Under the old approach, growth slowed to 0.7% – but the new component approach shows growth of 1.3% after the financial crisis. But output per job growth slowed to 1.0% a year under both approaches. Long-dated UK government bond prices are flat this morning, ahead of the Bank of England’s decisions at noon. This leaves the yield on 30-year UK gilts unchanged at 5.85%, and the 10-year yield marginally higher at 5.301%. Both measures hit multi-year highs earlier this week. The London stock market has opened higher, as investors shrug off last night’s US interest rate rise. The FTSE 100 share index has gained 82 points, or 0.8%, to 10,771 points. Although the Dow Jones industrial average of US stocks fell by 1.2% yesterday, the wider market reaction is quite subdued. Mark Haefele, chief investment officer at UBS Global Wealth Management, says: “We remain positioned for further equity gains while preparing for near-term volatility. If tightening remains measured, credit spreads remain stable, and profits continue to grow, the rally should have scope to broaden across sectors and regions. We recommend diversified equity exposure while avoiding excessive concentration in areas that are particularly sensitive to interest rates or rely on a single return driver.” Haefele also gives three reasons why markets might not be too rattled by the Fed: Much of the tightening is already priced in. Economic strength makes tightening more manageable. Strong earnings can counter higher yield There’s only a 20% chance that the Bank of England raises interest rates at noon today, according to the money markets. A hold – maintaining Bank rate at 3.75% – is an 80% shot. In the City, shares in retail chain Next have jumped after it lifted its profit forecast again. Next cheered shareholders this morning by reporting it has increased its profit guidance for this financial year by £12m, to £1.255bn. The increase is the result of a small upgrade in sales expectations and some additional cost savings, mainly in warehousing, it said. This looks to be the fourth profit upgrade from Next this year. However… the company has also lowered its forecast for sales growth in the UK this year, down from +2.8% to +2.0%. Next predicts a slow, steady decline as the year progresses, and warns chancellor John Healey not to raise taxes in next month’s budget, saying: Our primary concerns are rising inflation, higher mortgage interest costs and a weak employment market. These worries will only be compounded if they are accompanied by tax increases. Next’s shares are up 3.2% to £150, putting it at the top of the FTSE 100 risers. Given high energy prices are driving up UK inflation, the Bank of England will not be pleased to hear the latest transit data from the Middle East. Commodity vessel transits through the strait of Hormuz dwindled to just three ships on Wednesday, down from 12 a day earlier. Although this exclude any vessels that might have passed through the waterway with their Automatic Identification System transponders turned off to avoid detection, it underlines that oil and gas flows from the Middle East are still badly affected by the Iran war. Reuters has more details: Of the three vessels, an empty Supramax dry bulk ship entered the strait via the Iranian route, while an empty petroleum product tanker entered through a dark route, shipping data from Kpler showed at 0445 GMT. A Panamax tanker exited the waterway using a dark route, the data showed. Today’s interest rate decision comes at an increasingly difficult point for UK policymakers, says Daniela Hathorn, senior market analyst at Capital.com: This week’s data has painted a distinctly mixed picture: inflation is moving further above target and producer costs are accelerating, yet the labour market continues to soften. The result is an uncomfortable trade-off between guarding against a second inflation wave and avoiding unnecessary damage to an already fragile economy. Why is the Bank of England in the business of selling bonds anyway? In 2009 (after the financial crisis), the BoE began buying bonds with newly created money to push up their prices and bring down long-term interest rates. This process, called quantitative easing (QE) also aimed to support inflation and boost asset prices, and thus spur economic activity. After another burst of QE after the Covid-19 pandemic, the Bank build up its stock of bonds to £895bn. But it is now reversing that process, though QT. Quantitative tightening can be done through two ways – either selling a bond, or simply holding onto it until it matures, and then not reinvesting the money. Active bond sales have been criticised because the Bank is selling bonds for less than it paid for them. So, given QT pushes up government borrowing costs, and creates a loss for taxpayers, why do it at all? The Bank says: Unlike QE – which is used to reduce interest rates and therefore support inflation – the aim of QT is not to affect interest rates or inflation. Instead, the aim is to ensure that it is possible to undertake QE again in future, should that be needed to achieve the inflation target. There’s a full explanation here. Although the Bank of England may not raise rates today, money market pricing suggests borrowing costs are going to increase over the next year or so. As of last night, investors were pricing in four quarter-point increases by the end of 2027, which would lift Bank rate from 3.75% to 4.75%. Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets. It’s a crunch day for the Bank of England. The UK central bank will announce its latest interest rate decision at noon, and also reveal whether it has made any changes to its bond-selling programme. The City are pretty confident that the Bank will leave rates on hold, at 3.75%, despite inflation rising further away from its 2% target yesterday. But while perhaps three members of the monetary policy committee might vote for a hike, they’ll probably be outvoted by the other six…. (but you never know for sure!). The problem facing the Bank of England is that it has a mandate to control inflation, but there are signs that consumers are struggling – and a rate hike would add to that pressure on households. Kathleen Brooks, research director at XTB, explains: The labour market is weak, payrolled employment is falling, wage growth is negative in real terms and job vacancies are also at a multi-year low. July growth was stronger than expected, however, this was driven by AI Capex spend, and construction and manufacturing contracted last month. BoE policymakers might also feel slightly uncomfortable that other central bankers have been raising rates – including the US Federal Reserve yesterday (to the annoyance of Donald Trump). As Fed chair Kevin Warsh pointed out: “The plain fact is that [US] inflation is too high, and has been for too long. “This summer’s inflation readings do not tell me that underlying trends have meaningfully improved.” The Bank’s decision on quantitative tightening (QT) – the sale of bonds bought to stimulate the economy – is harder to call, and potentially more explosive. Economists expect the Bank to slow the pace of QT – perhaps to an annual pace of £50bn, down from £70bn over the last year. It might even halt the sale of long-dated bonds, where it has faced criticism for helping to push borrowing costs to multi-year highs. [This is because bond yields rise when prices fall, and prices are pushed down if one major bond-holder is determined to sell their gilts]. The Bank has already faced criticism from the Reform party for pressing on with QT, given the losses being incurred by taxpayers. The Guardian wrote earlier this week that QT needs to be revised, explaining: No other major central bank carries on in this way. Whatever one thinks of the losses, making the Treasury settle them immediately turns monetary choices into fiscal interventions. A report this week says that the Bank and Treasury are drawing up changes to QT to reduce pressure on raising interest rates. Independence seems to have been discarded in favour of quiet coordination. The MPC’s decisions cannot be beyond challenge. Andrew Bailey, the Bank’s governor, calls the overall cost of QT “neutral” – but only, as the economist Patricia Pino points out, when assessed over six decades. In fact, billions in cash demands fall within a parliament. Governments do not set budgets, fight elections or run public services over 60 years. It is unsustainable for the Bank to make decisions and have ministers face voters for the political consequences. The agenda 10am BST: Eurozone inflation report for August 12pm BST: Bank of England decision on interest rates and QT 1.3pm BST: US initial jobless claims data