Bailey: We’re not out of the woods yet on inflation
The Bank governor, Andrew Bailey, has warned that the UK is ‘not out of the woods’ in the cost of living squeeze.
Announcing today’s decision to leave interest rates on hold, Bailey said:
“Although we expect inflation to return to our 2% target, we’re not out of the woods yet so any future cuts will need to be made gradually and carefully.”
Food prices have been a key factor pushing up inflation, and there are forecasts that food inflation will rise towards 5.5% by the end of the year.
Key events
Huw Pill was correct to suggest quantitative tightening of £100bn over the next 12 months. rather than joining his colleagues in voting for less QT, argues Professor Costas Milas, of the Management School at the University of Liverpool.
He tells us:
In taking its decision to slow down QT to £70bn, the MPC was worried that more QT would harm UK GDP growth which is already weak. In fact, my own research (co-authored with Dr Papapanagiotou, University of Groningen), finds that QE/QT actions forecast well future UK growth.
Nevertheless, yesterday’s decision by the Fed to cut the Fed Funds rate by 0.25 percentage points will provide an extra spillover boost to UK growth. The latter makes me think that Huw Pill was largely spot on to suggest keeping the QT pace at £100bn because the Fed’s decision would definitely counteract a QT action of that (i.e. £100bn) size!
Intel shares surge after Nvidia takes stake
Away from the Bank of England, shares in Intel are surging after Nvidia, the world’s leading chipmaker, announced plans to invest $5bn in its smaller rival.
Intel’s shares have jumped by 24% after Nvidia announced it would team up with the firm to work on custom data centers that form the backbone of artificial intelligence (AI) infrastructure, as well as personal computer products.
Matt Britzman, senior equity analyst at Hargreaves Lansdown, says the deal is “a strategic alliance with geopolitical undertones”, explaining:
“Nvidia’s $5 billion investment in Intel is less about money and more about influence. The deal deepens cooperation between two US chip giants, with Intel set to use Nvidia’s GPU technology and Nvidia gaining a stronger foothold in domestic chip production.
For Intel, this is another welcome boost, both financially and strategically, as it leans on Nvidia to stay competitive. But even with the US government and Nvidia on side, it’s one step short of a home run for the foundry business, which is struggling to attract the major customers it needs to succeed against the might of TSMC.
Bailey: We’re not out of the woods yet on inflation
The Bank governor, Andrew Bailey, has warned that the UK is ‘not out of the woods’ in the cost of living squeeze.
Announcing today’s decision to leave interest rates on hold, Bailey said:
“Although we expect inflation to return to our 2% target, we’re not out of the woods yet so any future cuts will need to be made gradually and carefully.”
Food prices have been a key factor pushing up inflation, and there are forecasts that food inflation will rise towards 5.5% by the end of the year.
Michael Saunders, senior economic advisor at Oxford Economics and a former MPC rate setter, says the decision to slow QT and scale back the Bank’s sales of long-dated gilts is “sensible”.
Saunders says it reduces risks that QT could have adverse side effects by adding significant upward pressure on yields.
He also says that the MPC is in “no rush” to cut interest rates, even though the direction of travel for interest rates remains downwards, adding:
The MPC is clearly worried about risks of inflation persistence, especially that the current elevated level of inflation expectations will keep pay growth relatively high.
Before cutting again, the MPC will need to see stronger evidence that pay growth is slowing to a target-consistent pace and that slower pay growth will feed through to lower services inflation. This points to early 2026 for the next rate cut, rather than before the end of this year.
ING: future rate cuts ‘hang in the balance’
James Smith, developed markets economist, UK, at ING, predicts “two to three further cuts” to UK interest rates are to come.
He still “narrowly” favour a November cut, if next month’s inflation numbers show an improvement in the cost of living squeeze.
Smith tells clients:
The Bank of England is still biased towards cutting rates further and we expect two to three further 25bp moves by next summer. But whether we get another cut this year is uncertain. We still narrowly favour a November cut, assuming there’s better news in the next set of inflation numbers.
However, the Bank might wait until it has seen Rachel Reeves’s budget, scheduled for late December.
Smith says:
We do expect the next inflation report, which comes ahead of November’s meeting, to undershoot the BoE’s forecasts slightly on services. Then again, the Budget falls a few weeks after the 6 November decision, which means the Bank may not fully bake it into its decision-making until it updates its forecasts again in February.
We’re still narrowly favouring one more cut this year, though that’s a low conviction view. November looks fairly 50:50 to us right now and the data will decide one way or the other.
When might the Bank of England cut interest rates next?
UK borrowers and savers will be keen to know when the Bank of England is next likely to cut interest rates. City forecasts differ.
Paul Dales, chief UK economist at Capital Economics, argues that “the appetite for rapid rate cuts has waned”. He points out that today’s 7-2 voting pattern shows less of a split than in June, when three policymakers wanted to cut rates.
Dales tells clients:
While leaving interest rates at 4.00% today (as expected) and signalling that rates will still fall from here, the Bank of England reiterated its concerns over rising inflation. As a result, we continue to think the Bank won’t cut rates again until February.
Neil Mehta, portfolio manager at RBC BlueBay Asset Management, thinks a pre-Christmas interest rate cut is possible:
We think labour market dynamics remain Governor Bailey’s focus where we are starting to see signs of weakness, particularly in the private sector. For now, public sector wage growth distorts broader figures as unions continue to wield power over the government. We think inflation peaks next month near 4.0% before possibly stabilising for the remainder of the year. However, fiscal measures, particularly on food prices and public wages, pose significant upside risks, on the flip side, improved fourth-quarter data and aggressive rate cuts by the Federal Reserve could spur BoE action in December.
But…Nicolas Sopel, head of macro research and chief strategist at Quintet Private Bank, predicts rate cuts won’t come until 2026:
No surprises from the Bank of England today. As expected, the Bank Rate stays at 4% following a 7-2 vote. But the real shift is in quantitative tightening (QT): the BoE is scaling back its bond sales, the so-called quantitative tightening, from £100bn to £70bn a year. That’s a win for markets— less gilt supply and a smaller hit to the Treasury’s budget covering the loss of the BoE, which’s been selling bonds with yields rising.
Looking ahead, sticky inflation means rates are likely to remain at 4% through 2025. But with the labour market softening — falling vacancies and easing wage growth — we expect inflation to cool in 2026, opening the door to rate cuts.
NEF: Slowing QT is a double-edged sword for the chancellor
It’s becoming popular in media circles to dub all policy decisions, or economic data, as either a “boost” or a “blow” to Rachel Reeves.
But… today’s decision on QT requires more nuance. Although it takes some selling pressure out of the bond market, it could also add to the losses made on those quantitative easing bond purchases [because they were bought at higher prices than they can be sold for today].
Dominic Caddick, economist at the New Economics Foundation, explains:
“Slowing quantitative tightening is a double-edged sword: it will ease pressure in bond markets but at the same time it will tighten the constraints the chancellor has imposed on herself through her fiscal rules. The Bank will be holding bonds on its balance sheet for longer. This prolongs the interest paid out on the central bank money created to buy bonds, which is currently outstripping the interest the Bank receives from those bonds.
“The Bank is effectively paying a massive subsidy to the banking sector, covered by money from the Treasury. But the Bank could reduce this by following the example of Switzerland and the Eurozone, by choosing to pay zero interest on some reserves. Or the chancellor could choose to simply tax commercial banks to reclaim some of their windfall.
“But these changes to quantitative tightening would not cause such a headache for the chancellor if she scrapped the Osborne-era policy of covering Bank of England losses with Treasury money. The European Central Bank and Federal Reserve are responsible for absorbing their own losses – the Bank of England should start doing the same.
There’s not much reaction in the bond market to the Bank of England’s decision to slow the pace of its quantitative tightening programme.
The yields, or interest rate, on UK 10 and 30-year bonds are little changed today, meaning there’s been no meaningful change to prices.
Kathleen Brooks, research director at brokerage XTB, says:
Quantitative tightening was loosened to £70bn this year, down from £100bn previously, the Bank will also slow the pace of long dated Gilt sales relative to other maturities.
The market impact has been mild. If some had been looking for a drop in 30-year UK Gilt yields, they will have been disappointed, The good news about looser QT had already been priced in, and the 30-year Gilt yield is up slightly on this news, although yields are down slightly at the shorter end of the curve. The pound has backed away from the highs of the day so far on this news, although it remains mid-pack compared to the rest of the G10.
Looking ahead, the Bank of England says that “a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate.”
That’s a sign that it expects to continue cutting interest rates in the months ahead, if inflation falls back towards target as it expects.
The Bank also repeats an earlier statement that “the restrictiveness of monetary policy has fallen as Bank Rate has been reduced.” Although that’s a statement of the obvious, it’s could also be a signal that the Bank recognises that its recent cuts to interest rates are having an effect.
About that QT reduction….
Confusingly, the Bank of England is actually planning to actively sell more UK government bonds over the next year than in the last 12 months, despite agreeing a smaller reduction to its QT programme.
That’s because there are two ways that the Bank can cut its holdings of government bonds – it can sell ‘em, or it can wait until they mature.
The £100bn reduction in its stock of government bonds (bought to stimulate the economy) in the last year mainly came from maturing bonds, with just £13bn from active gilt sales.
The new plan agreed today means the Bank will sell actively sell £21bn of gilt sales, with £49bn of bonds also due to expire over the next year, taking the total reduction to £70bn
Interestsingly, the Bank has also decided to change the “maturity composition of sales”, selling fewer long maturity sector gilts than gilts at other maturities.
That could take pressure off longer-dated government borrowing costs, which hit 27-year highs earlier this month.
Bank also split 7-2 over bond sale plan (updated)
The Bank was also split over its decision to cut the amount of government bonds it holds.
Seven MPC members, Andrew Bailey, Sarah Breeden, Swati Dhingra, Megan Greene, Clare Lombardelli, Dave Ramsden and Alan Taylor, voted in favour of cutting its UK government bond holdings by £70bn over the next year.
Catherine Mann wanted to cut the stock of UK government bond purchases by £62bn [updated].
But chief economist Huw Pill wanted to cut bond holdings by £100bn, meaning the same pace of reduction as over the last 12 months.
Bank split 7-2 over interest rate decision
The Bank of England was split over today’s decision on interest rates, choosing not to cut borrowing costs by 7 votes to 2.
Governor Andrew Bailey, deputy governors Sarah Breeden, Clare Lombardelli and Dave Ramsden, chief economist Huw Pill and external members Megan Greene and Catherine Mann all voted to leave rates on hold at 4%.
But the other two external members, Swati Dhingra and Alan Taylor, voted to reduce Bank Rate by 0.25 percentage points, to 3.75%.
Last month, Taylor had initially pushed for a half-point cut, to 3.75%, before voting for a quarter-point cut at an unprecedented second vote after the MPC was split 4-4-1, while Dhingra has been the most dovish member of the committee in the last few years.
BoE slows pace of QT programme
The Bank of England has slowed the pace of its quantitative tightening programme, which cuts its stocks of government bonds,as well as leaving UK interest rates on hold today.
The BoE’s monetary policy committee has decided to dial back the speed of its “quantitative tightening” (QT) programme, to £70bn over the next year. That’s down from £100bn over the last 12 months.
The move follows concerns that the Bank’s sales of government bonds are adding to volatility in the debt market, pushing up borrowing costs, and creating losses for the BoE.
City economists had expected the QT programme to be cut to around £70bn, so today’s decision is in line with forecasts.
Since 2022, the BoE has reduced its gilt holdings from £875bn to £558bn, by selling some of the bonds it bought during its “quantitative easing” stimulus programmes in the financial crisis and the Covid-19 pandemic.
Slowing QT could be a helping hand for Rachel Reeves, because the Bank’s gilt sales have added to pressure on bond prices, pushing up bond yields and adding to the cost of servicing the national debt.
On the other hand, some economists have predicted that scaling back the pace of QT would increase the costs to British taxpayers, as the BOE is losing money on the holdings.
UK interest rates unchanged at 4%
Newsflash: The Bank of England has voted to leave UK interest rates on hold, as expected.
Following its latest meeting, the Bank’s monetary policy committee decided to leave borrowing costs unchanged.
The MPC held rates a day after UK inflation was recorded at 3.8%, almost double the Bank’s 2% target, despite signs that the jobs market is cooling.
Stand By Your Desks! Bank of England is up next.
I am expecting a change in the rate of QT or bond sales this time around…..It was £100 billion per annum.— Shaun Richards (@notayesmansecon) September 18, 2025
