The Bank of England has delivered a double-edged verdict that offers Chancellor Rachel Reeves minimal comfort as she finalises her critical autumn budget. In a closely watched decision, the Monetary Policy Committee (MPC) voted 6-3 to maintain the Bank Rate at its current 5.25% level.
While this marks the fourth consecutive meeting without change, the vote split reveals growing division within the committee. Three members pushed for an immediate increase to 5.5%, signalling persistent concerns about inflationary pressures within the economy.
Quantitative Tightening Takes Centre Stage
In a parallel move that caught market attention, the Bank announced a significant scaling back of its quantitative tightening (QT) programme. The pace of gilt sales will be reduced from £10 billion to £7.5 billion per quarter over the next twelve months.
This cautious approach to unwinding the massive bond portfolio accumulated during the financial crisis and pandemic reflects the Bank's delicate balancing act. Officials aim to normalise monetary policy without triggering market turmoil or undermining economic stability.
Limited Room for Manoeuvre
For Chancellor Reeves, these decisions create a challenging backdrop for her upcoming budget. The maintained interest rates keep borrowing costs high for both the government and consumers, constraining fiscal options.
Analysts suggest the modest adjustment to QT provides only marginal relief to gilt markets. With government borrowing requirements remaining substantial, the Treasury faces continued pressure in debt markets.
The Bank's latest forecasts, while not explicitly detailed in the announcement, are understood to reflect concerns about stubborn service sector inflation and ongoing wage growth pressures. These factors continue to complicate the path to the Bank's 2% inflation target.
Political Implications
This monetary policy stance leaves the Chancellor with limited fiscal headroom. The combination of high borrowing costs and constrained monetary support means Reeves must navigate her budget preparations without the tailwind of anticipated rate cuts or more aggressive QT adjustments.
Financial markets have now largely priced out significant rate reductions before mid-2025, creating a extended period of tight financial conditions that will shape the Chancellor's budgetary calculations.
The coming weeks will reveal how the Treasury responds to this challenging monetary environment as it finalises its fiscal plans amid growing economic uncertainty.
