The Bank of England (BoE) left its policy rate unchanged at 3.75% for the sixth consecutive meeting, with a 6-3 vote among policymakers, as most of the majority bloc indicated that further tightening may be needed in the future [1][2]. While the rate decision was widely anticipated, the BoE surprised markets with a significant overhaul of its quantitative tightening (QT) program. The central bank announced it would pause sales, permanently hold long Gilts, and conduct structured sales of GBP 146 billion worth of Gilts maturing between 2035 and 2049 at a pace of GBP 20 billion per year directly to the government via the Debt Management Office (DMO), rather than through market auctions as previously done [1]. This move is expected to ease long-end yield risks, as evidenced by a 12 basis point drop in the 30-year Gilt following the announcement [1]. MUFG analysts view these changes as modestly positive for the Pound, particularly by reducing risks to the Gilt market ahead of the budget on October 28 [1].
Despite the QT overhaul, the Pound initially fell after the BoE announcement, reflecting a less hawkish stance compared to other major central banks [2]. However, stronger-than-expected UK Retail Sales data provided some support to the British Pound. The Office for National Statistics reported that UK Retail Sales rose 0.5% month-on-month in August, beating expectations for a 0.2% decline, and increased 2.4% year-on-year, surpassing the 1.9% forecast. Retail Sales excluding fuel also rose 0.6% MoM and 2.7% YoY [2]. As a result, the EUR/GBP cross remained little changed around 0.8587, continuing its narrow range trading [2].
BoE Governor Andrew Bailey kept the door open to future rate hikes, stating that if the conflict in the Middle East persists and the risk of second-round effects increases, policy may need to tighten further [2]. Market pricing remains aggressive, with the swaps curve implying about 100 basis points of BoE rate hikes in the next twelve months to 4.75% [2]. However, Brown Brothers Harriman (BBH) analysts argue that the BoE may not need to tighten as much as markets expect, citing the UK economy's operation below capacity, the current Bank Rate near the top of the estimated neutral range, and the likelihood of more restrictive fiscal policy [2]. BBH concludes that the Pound remains vulnerable to a dovish BoE repricing [2].
No direct market reaction data such as equity or FX moves beyond the Gilt yield and EUR/GBP cross were provided, but the overall sentiment is that the BoE's actions have reduced some downside risks for the Pound while leaving it exposed to future policy shifts and economic developments [1][2].
CONCLUSION
The Bank of England's decision to maintain rates and implement a surprise QT overhaul has eased long-end Gilt market risks and provided modest support for the Pound, especially in light of stronger-than-expected UK Retail Sales. However, the central bank's less hawkish stance compared to peers and ongoing economic uncertainties leave the Pound vulnerable to further repricing. Market participants will closely watch upcoming policy signals and economic data for further direction.