Bank of England Slows Bond Sales to 7 Billion Pounds, Maintains 4% Interest Rate

The Bank of England has announced that it will slow down the pace of its quantitative tightening program and reduce the sale of long-term government bonds. This decision aims to minimize the impact on the volatile bond market. The policy makers voted 7 to 2 to reduce the annual reduction of government bonds (purchased between 2009 and 2021) from 10 billion pounds to 7 billion pounds. This adjustment aligns with the median expectation of a survey, which predicted a reduction to 6.75 billion pounds.

The Governor of the Bank of England stated that this new target allows the Monetary Policy Committee to continue reducing the central bank's balance sheet in line with monetary policy objectives while minimizing the impact of bond market volatility. This is the first adjustment since the Bank of England began selling bonds in 2022. Previously, the bank had purchased 875 billion pounds in government bonds between 2009 and 2021 to stimulate economic growth.

The Chief Economist of the Bank of England voted to maintain the annual reduction at 10 billion pounds, arguing that the current plan has a minimal impact on the market. Meanwhile, a member of the Monetary Policy Committee advocated for accelerating the reduction, proposing a scale of 6.2 billion pounds.

The Bank of England stated that over the next year, bond sales will be calculated based on the initial purchase price and distributed among short-term, medium-term, and long-term bonds in a 40:40:20 ratio. Earlier this month, long-term government bond yields in the UK reached their highest level since 1998.

In addition, against the backdrop of calls from Monetary Policy Committee members for a rate cut, policy makers voted 7 to 2 to maintain the interest rate at 4% following a 25 basis point cut last month. This decision aligns with the survey's expectations. The Bank of England reiterated its previous forecast that inflation will peak at 4% this month and gradually return to the 2% target by the second quarter of 2027. It also slightly raised the economic growth forecast for the third quarter from 0.3% to 0.4%.

The Governor of the Bank of England emphasized that while inflation is expected to return to the 2% target, the current situation is still uncertain. Therefore, any future rate cuts must be gradual and cautious. Before the decision was announced on Thursday, the market estimated a one-in-three chance of further rate cuts this year.

The Bank of England's quantitative tightening plan is unlikely to disrupt the UK's financing environment. The central bank has established a "standby repurchase facility" to provide liquidity support for the UK financial system. The design of this facility ensures that the pace of quantitative tightening does not affect the supply of reserves.