Key facts
- The Bank of England is expected to hold interest rates steady at 5.25% this week.
- Rising oil prices are a concern, but officials are waiting for clearer signs of sustained domestic inflation before considering a rate hike.
- The BoE is anticipated to slow the pace of its quantitative tightening program.
- The central bank's bond holdings have decreased by over £400 billion since February 2022.
- Some analysts suggest a surprise 25 basis-point rate hike cannot be ruled out.
- Financial markets are pricing in a 30% chance of a rate hike on September 17.
The Bank of England is widely expected to maintain its benchmark interest rate at 5.25% this week, resisting pressure to raise rates further despite a significant increase in oil prices. Governor Andrew Bailey has indicated that the central bank will not pursue a rate hike unless the surge in energy costs leads to more persistent domestic inflation.
Economists surveyed by Reuters are in consensus that the Monetary Policy Committee (MPC) will hold rates steady in September, with most anticipating a rate cut next year rather than a further increase. However, the recent climb in oil prices, which have surpassed $100 a barrel, has led some analysts, like Barclays' Moyeen Islam, to suggest that a surprise 25 basis-point hike cannot be entirely discounted.
Financial markets are currently pricing in a 30% probability of a rate increase on September 17, a notable rise from less than 10% at the start of the previous week. Despite this, Bailey has emphasized the need for clear evidence of sustained pay growth or broad-based price increases before considering a rate hike.
In addition to interest rates, the MPC will also vote on the pace of quantitative tightening (QT), the process of reducing the central bank's bond holdings. Since February 2022, the BoE's bond portfolio has shrunk by over £400 billion. Last year, the pace of QT was slowed to £70 billion annually from £100 billion, and further reductions to around £50 billion per year are anticipated from October 2026 to September 2027. While the reduction in maturing gilts is a key factor, the amount actively sold is only slightly below the previous year's level.
Estimates on the impact of QT on gilt yields vary, with some suggesting a 25 basis-point impact on 10-year gilts and a much larger impact on longer-dated bonds. The prices of 20- and 30-year gilts recently fell to their lowest levels since 1998, and some expect the BoE to halt sales of these longer-dated bonds entirely. Analysts are also looking for clarity on the long-term strategy for the central bank's balance sheet, with some suggesting a shift from rapid reduction to focusing on its long-run structure.