BoE Statement: Rates kept at 4.00% (exp. 4.00%) in a 7-2 vote (exp. 7-2; prev. 5-4 to cut rates); Bailey maintains 'gradual and careful' language

VOTE SPLIT:

• Voted 7-2 to keep rates at 4.0% (exp. 7-2), with Dhingra and Taylor voting to cut rates by 25bps

QT:

• Voted 7-2 to slow QT pace to GBP 70bln (exp. 70bln; prev. GBP 100bln)


• Pill voted to maintain QT pace at GBP 100bln


• Mann voted to slow QT pace to GBP 62bln


• To hold two GBP 775mln stg short-dated gilt auctions, two GBP 750mln stg medium-dated gilt auctions, and one GBP 550mln long-dated gilts auction in Q4


• 2025/26 gilt sales will be split 40:40:20 between short-, medium- and long-maturity buckets in initial proceed terms (2024/25 had equal split)

GOVERNOR REMARKS:

• BoE Governor Bailey says we're not out of the woods yet so any future rate cuts will need to be made gradually and carefully
  


• New QT target means MPC can continue to reduce size of balance sheet while continuing to minimise impact on gilt market

STATEMENT:

• Statement maintains phrase: "a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate"


• Statement maintains language that monpol not on pre-set path

ECONOMY:

• CPI forecast to peak at 4% in September 2025 (vs August forecast to peak at 4% in September)


• Staff forecast Q3 GDP to increase by around 0.4% Q/Q (August: +0.3%)


• Rise in firms' social security contributions appears to be delaying reduction in total labour costs growth until 2026

TRADE:

• Impact of US tariff rates on world economy could be slower, not smaller than previously thought

Reaction details (12:16)

• GBP unreactive.


• Gilts fell from 91.58 to 91.38 in an immediate reaction before then lifting back to pre-release levels and extending to a 91.69 peak.

Analysis details (12:16)

• As expected from the BoE. Base Rate maintained at 4.00% via a 7-2 vote split with Dhingra and Taylor voting to cut by 25bps (widely expected).


• The main focus for the announcement was the APF update, overall, this was as expected though the GBP 70bln reduction perhaps disappoints some calls for a larger pullback from the prior period's GBP 100bln remit. Based on redemptions of GBP 49bln, this now implies an increase in active sales to GBP 21bln (prev. 13bln). The breakdown of this was as suggested by some, with a skew away from the long-end and towards the short-end. Specifically, the short vs. medium vs. long breakdown is now a 40:40:20 split (prev. equal).


• For the GBP 70bn figure, there was dissent with Mann preferring GBP 62bln and Pill preferring it to be maintained, Mann’s justification was that GBP 62bln would maintain the active sales amount at GBP 13bln and reduce the potential for short rate volatility and moderate pressure on the middle tenor, where policy transmission is the strongest. Pill wanted it maintained to provide consistency, arguing that recent Gilt market developments were mainly unrelated to QT.


• On the latter point, the discussion notes the MPC recognised that although the Gilt market has functioned in an orderly manner, there are factors that pose a risk “that QT would have a greater impact on market functioning than previously”.


• Overall, as expected from the BoE with the kneejerk pressure in Gilts perhaps a function of markets unwinding expectations for a larger reduction in the headline amount, given the active sale argument outlined neatly by Mann. However, this reversed and we are ultimately a touch above pre-release levels for Gilts (GBP unphased), likely in acknowledgement of the skew away from the long-end towards the short-end of the curve.

18 Sep 2025 - 12:00- ForexData- Source: Newswires