Central bank opts for more gradual reduction in gilt holdings, signals caution amid market volatility
The Bank of England’s Monetary Policy Committee (MPC) has announced it will reduce the stock of gilts held in its asset purchase facility by £70 billion over the coming year, a slower pace than the £100 billion reduction seen in the previous period.
The move reflects the central bank’s efforts to avoid unsettling financial markets while continuing its programme of quantitative tightening (QT).
At its latest meeting, the MPC voted 7-2 to maintain the bank rate at 4%, a decision that had been widely expected. However, the decision on quantitative tightening took centre stage, with the committee agreeing to scale back the pace of gilt sales. The reduction is partly due to expectations of lower gilt redemptions in the next twelve months, while active sales will rise slightly to £21 billion.
The bank also revealed a shift in its approach to gilt sales, with 40% allocated to short-dated, 40% to medium-dated, and 20% to long-dated gilts. This adjustment, moving away from an even distribution, is intended to avoid adding to recent upward pressure on yields for longer-term government bonds.
This more gradual approach to quantitative tightening is likely to ease upward pressure on long-term gilt yields, which influence fixed mortgage rates. By focusing sales on shorter maturities and holding the bank rate steady, the MPC aims to maintain stability in financial markets. As a result, mortgage rates are expected to remain broadly stable in the near term, with any significant reductions unlikely until the bank signals a move towards rate cuts, anticipated in 2026.
🧐What on earth did the @bankofengland just do, and why does it matter for all of us?
— Ed Conway (@EdConwaySky) September 18, 2025
My attempt to explain the Bank's change to its quantitative tightening programme 👇
I promise it's more interesting than that prob sounds. Video (& charts) to follow...https://t.co/nFzO71JdMO
“The decision to slow QT and scale back sales of long gilts is sensible and reduces risks that - in current stressed gilt market conditions - QT could have adverse side effects by adding significant upward pressure on yields,” said Michael Saunders, senior economic advisor at Oxford Economics and a former MPC rate setter.
For industry commentator Nicholas Mendes, from London broker John Charcol, easing the QT pace “looks sensible” given the heavy gilt supply and the run up to the Nov. 26 Budget. “It lowers the risk of unsettling the gilt market and keeps attention on returning inflation to target,” he said.
According to Andrew Goodwin, chief UK economist at Oxford Economics, the reduction in the pace of quantitative tightening was broadly in line with market expectations.
“The MPC appears to have been keen to avoid causing any market stress in arriving at a number close to what market participants had expected,” Goodwin said. “The BoE’s announcement that it would focus sales more on shorter maturities also reflects a desire to avoid adding to recent upward pressure on yields at the longer end of the curve.”
Minutes from the meeting indicated that the committee remains cautious about the outlook for inflation. Most members were concerned that inflation expectations could rise, and there was no indication of an imminent rate cut. The two dissenting members, Alan Taylor and Swati Dhingra, favoured a 25 basis point reduction in the bank rate, citing subdued consumer spending and signs of weakness in domestic demand.
Despite these calls for looser policy, the majority of the committee preferred to keep rates unchanged, balancing risks from persistent inflation against those from slower growth and employment. The MPC signalled that it expects to maintain bank rate at 4% for the remainder of the year, with any policy easing likely to resume in early 2026.
Looking ahead, the pace of quantitative tightening is expected to slow further, in line with market expectations and the anticipated decline in gilt redemptions. The MPC’s approach suggests a willingness to adjust the pace of tightening in response to market conditions, rather than adhering to a fixed schedule.
“The MPC made no effort to prepare the ground for a November rate cut,” Goodwin noted. “Concerns that inflation expectations may rise seem to be dominating the MPC’s thinking. So we expect it to extend the pause for the rest of this year, before resuming loosening policy in early 2026.”
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