Bank of England Holds Rates Steady as Quantitative Tightening Slows

Sterling hit a seven-week low of $1.3346 following the announcement, while the euro climbed to a one-week high of 0.8592 pounds. Investors reacted to the central bank's cooling stance by trimming expectations for future rate hikes; the probability of a November increase dropped to 64% from 84%. Ten-year gilt yields slid to 5.222%, shedding more than 7 basis points, while thirty-year yields fell by nearly 10 basis points to 5.758%.

Beyond the rate decision, the bank unveiled plans to overhaul its quantitative tightening policy. The annual pace of gilt sales will decelerate to 46 billion pounds until 2034, a marked reduction from the current 70 billion-pound program. Esther Watt of Evelyn Partners noted the move underscores a preference for a gradual, predictable unwind of bond holdings, positioning the Bank Rate as the primary lever for policy adjustments.

While U.K. annual inflation ticked up to 3.1% in August, officials remain focused on the absence of significant second-round effects in wages. Underlying core inflation held steady at 2.6%, and the domestic labor market continues to show signs of stagnation, with payrolled employment falling by 39,000 in the three months through July. This cautious approach places the Bank of England at odds with the Federal Reserve and European Central Bank, both of which recently opted for rate increases.