Embattled Chancellor needs to cut her borrowing costs
Rachel Reeves is in a bind. Boxed in by her own fiscal rules, she is now desperately juggling a variety of potential taxes to help her get the country’s accounts straight – but there might be the faintest glimmer of light in her financial tunnel. News is breaking that the Bank of England is expected to ease back on its bond-selling programme this week, a move that could cool surging gilt yields and offer some respite to mortgage markets.
Yet with inflation stubbornly high, borrowers should brace for a choppy path on interest rates.
Since 2022 the Bank has been reducing its gilt portfolio by around £100bn annually, selling securities outright rather than simply letting them mature. This makes it unusual among major central banks, which have favoured passive approaches. Holdings have already fallen from £875bn to about £558bn.
Now, according to a Reuters poll, the Monetary Policy Committee is expected to reduce the pace of disposals to about £67.5bn, with other analysts pointing to nearer £70bn. Some expect the Bank to stop selling longer-dated bonds that have seen the sharpest losses.
Yields on long-dated gilts have climbed to levels not seen for more than a quarter of a century, intensifying the cost of borrowing for the Treasury ahead of Chancellor Rachel Reeves’s autumn budget. The Bank has estimated that its tightening programme has so far added only 0.15–0.25 percentage points to government borrowing costs, though investors remain concerned about its market impact.
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Tomasz Wieladek, chief European economist at T. Rowe Price, told Reuters: “If they leave it unreduced, the market will sell off significantly.” He suggested that the Bank would likely reduce the pace to £80bn but halt sales of longer-dated bonds.
Former policymakers have also urged caution. Michael Saunders, who served on the MPC, told The Guardian: “It is highly likely they will slow the pace … The gilt market and bond market in general are weak and volatile.” Another ex-MPC member, quoted anonymously by The Guardian, warned: “It definitely has to be reduced. Not reducing it would be completely tone deaf to what’s happening in the global bond markets.”
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For others, though, a significant slowdown could risk sending the wrong message. Adam Dent, UK rates strategist at Santander CIB, told Reuters: “Continuing QT would therefore be a useful demonstration of independence, and ultimately be a net positive for the country by reinforcing much-needed credibility in the fight against high inflation.”
Andrew Sentance, another former MPC member, struck a similar note in The Guardian, saying: “The job of the Bank is not to make the chancellor’s life easy. Its job is to control inflation. And a modest winding back on QT would be quite consistent with that.”
The debate over bond sales comes at a time when the inflation picture remains fraught. At 3.8 per cent in July, Britain’s rate was the highest among the G7. The Bank itself expects inflation to touch 4 per cent this month.
Governor Andrew Bailey has told lawmakers that there is now “considerably more doubt about exactly when and how quickly” the Bank might lower rates, Reuters reported. Markets currently expect no further cut until 2026, though a majority of economists polled still anticipate another move later this year.
Commentators note that weakening growth and a cooling jobs market would eventually push rates “materially lower”, arguing that markets are overestimating the strength of UK demand.
For mortgage lenders and brokers, the outcome is crucial. Gilt yields directly shape swap rates, the benchmarks underpinning fixed-rate mortgage pricing. Any easing in the Bank’s bond sales could relieve upward pressure on borrowing costs, improving affordability and client confidence.
But with inflation still elevated and the Bank reluctant to appear politically swayed, volatility remains the order of the day. For the housing and mortgage market, the next few months are likely to bring uncertainty rather than clarity. Stability in lending costs may not arrive until inflation shows a more decisive retreat and the central bank feels able to pivot more openly towards rate reductions.
