Bank of England expected to leave UK interest rates on hold and slow bond-selling QT programme – business live

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Bank of England urged to slow bond-selling plan to help cut record UK borrowing costs

Andrew Wishart, senior UK economist at Berenberg, says there is “no chance” of a change in interest rates today, so the focus will instead be on the pace of quantitative tightening (QT).

Wishart adds:

We expect the BoE to slow the pace of balance sheet reduction from £100bn to £60bn per annum (consensus £72bn). That would both keep the amount of active sales the BoE undertakes broadly steady and decrease the payments HM Treasury (HMT) makes to the BoE to cover its losses, thereby reducing the budget deficit. Slower QT would be a win-win for bond holders.

The bonds on the BOE’s balance sheet have been losing value as bond prices have fallen, and yields have risen in recent years. In contrast, the amount that the BOE pays in interest on bank reserves has been rising, and the BOE has required Treasury transfers to manage this.

Ultimately, this will be for the Chancellor to solve, and it could lead to bank taxes included in this Autumn’s budget.

The vote split. We expect a 7-2 vote split to keep Bank Rate on hold. Alan Taylor and Swati Dhingra, we think, will opt for a quarter-point rate cut in September.

The forward guidance. If there’s any surprise in the MPC minutes, it’s likely to come from the Bank’s forward guidance. There are three paths here the MPC can take: one, stick to its current guidance of ‘gradual and careful’ rate cuts, two, tweak its current guidance to ‘gradual and cautious’ rate cuts, or three, simply, drop the current guidance entirely. We place a 40/20/40 probability for each of the three paths. Indeed, there’s a material risk, in our view, that the MPC abandons its ‘gradual and careful’ guidance surrounding the downward path for Bank Rate.