Investors Expect Bank of England to Scale Back QT in Coming Year, Survey Shows

A recent survey reveals investors are bracing for the Bank of England (BoE) to significantly scale back its quantitative tightening (QT) program in the coming year. The central bank’s projected QT volume for 2025–2026 has dropped from an initial £85 billion to £75 billion—a 12% reduction and the lowest forecast since August 2024. This adjustment reflects growing concerns over market instability, rising gilt yields, and fiscal pressures, reshaping investor strategies in equities, currencies, and fixed income.

The QT Adjustment: A Response to Mounting Risks

The BoE’s revised QT path, detailed in its May 2025 Monetary Policy Report, aims to balance fiscal prudence with financial stability. The reduction stems from three key factors:
1. Market Volatility: Rapid QT could exacerbate gilt yield rises, destabilizing pension funds and other institutions reliant on stable bond prices.
2. Fiscal Pressures: The UK government’s pledge to cover £30 billion in losses from the BoE’s gilt portfolio has raised questions about long-term fiscal sustainability.
3. Global Headwinds: Geopolitical tensions, trade wars, and inflationary pressures have increased uncertainty, prompting a cautious recalibration.

The BoE’s decision to prioritize stability over aggressive QT aligns with its principle of “gradual and predictable execution.” However, this slowdown has intensified debates over whether the central bank is underestimating the need to normalize monetary policy.

Investor Reactions: Currency Weakness and Portfolio Shifts

The reduced QT expectations have already reshaped market dynamics:

1. Currency Markets:
2. The British pound (GBP) has weakened against the U.S. dollar, with GBP/USD dropping below 1.3300 following the BoE’s anticipated rate cut to 4.25%.

4. The Fed’s hold on rates at 4.25%-4.5% and its cautious stance have amplified USD demand, further pressuring Sterling.

5. Equity and Fixed Income:

6. European equities, particularly German stocks (e.g., DAX +15% year-to-date), have attracted capital as investors seek cheaper valuations and fiscal stimulus opportunities.

8. Gilt yields have surged to multi-year highs, reflecting QT’s lingering impact and inflation concerns.

9. Corporate Debt Risks:

10. The BoE’s Financial Policy Committee (FPC) warns of vulnerabilities in leveraged corporate sectors, especially those with dollar-denominated debt. Rising interest rates and tighter credit conditions could strain refinancing capabilities.

Broader Economic Implications

The BoE’s QT slowdown is part of a global recalibration of monetary policy. Key trends shaping investor decisions include:
- Trade Fragmentation: U.S. tariffs and geopolitical disputes have triggered volatility, with equities and commodities suffering sharp declines in April 2025.
- AI and Productivity: While AI-driven efficiencies may eventually lower inflation, near-term risks include supply chain disruptions and labor market dislocations.
- Sovereign Debt Pressures: Germany’s defense spending surge and Italy’s fiscal reforms highlight how geopolitical shifts are reshaping bond markets.

Conclusion: Navigating the New Policy Landscape

Investors must contend with a landscape where the BoE’s QT adjustments, alongside global trade wars and fiscal uncertainties, demand cautious portfolio management. Key data points underscore this reality:
- The BoE’s QT reduction to £75 billion reflects a 12% cut from earlier plans, signaling a preference for stability over rapid normalization.
- GBP/USD’s decline to below 1.3300 highlights currency risks amid divergent policy paths between the BoE and Fed.
- UK 10-year gilt yields, now above 4.5%, indicate markets are pricing in prolonged QT-related pressures.

To mitigate risks, investors should:
1. Diversify Geographically: Shift capital toward European equities and infrastructure plays, such as Germany’s defense-driven reforms.
2. Focus on Quality: Prioritize firms with strong balance sheets and pricing power to navigate QT-driven volatility.
3. Monitor Policy Signals: Track the BoE’s May 2025 report and FPC warnings on corporate leverage, as these will guide market sentiment.

In this era of policy recalibration, investors must balance short-term caution with long-term growth opportunities—a challenge that demands both vigilance and strategic foresight.