The Bank of England is set to slow down its bond sales while keeping interest rates steady at 4%. This decision is anticipated during Thursday’s meeting, where policymakers are likely to vote 7–2 to maintain the current rate after a recent close 5–4 vote to lower rates. Markets predict that the annual rate of gilt sales will decrease from £100 billion to about £67.5 billion. Some forecasts even hint at a further drop to £60 billion or a shift to shorter-term bonds. While the Bank of England downplays the effect of quantitative tightening on borrowing costs, others believe it has increased market volatility and raised long-term gilt yields.

UK Inflation and Borrowing Costs

The UK has the highest inflation and government borrowing costs in the G7. Inflation stood at 3.8% in August, nearly double the central bank’s target. The Bank expects inflation to peak at 4% before gradually returning to target by mid-2027. Governor Andrew Bailey mentioned there is uncertainty regarding how fast rates will be cut in the future. Futures markets currently indicate a 30% chance of another rate cut this year, although economists foresee potential cuts in the upcoming months. A bigger-than-expected slowdown in quantitative tightening might lead to lower gilt yields, while the pound could strengthen if the Bank adopts a more hawkish tone. The Bank of England’s announcement is set for 11:00 GMT. With the Bank of England holding rates at 4%, we find ourselves in a challenging situation in the coming weeks. Inflation remains at 3.8%, almost double the target, making the Bank cautious about cutting rates further despite external pressures. While this inflation rate is high, it is a significant decline from the over 10% peak experienced in 2023. The highlight for bond traders is the expected reduction in gilt sales from £100 billion to around £67.5 billion. We might consider using gilt futures to speculate on an even larger decrease, potentially to £60 billion, which would likely boost bond prices. The UK bond market is sensitive to these developments, particularly recalling the volatility experienced in late 2022 when 10-year gilt yields surged above 4.5%.

The Bank of England’s Stance on Inflation

For currency traders, the Bank’s tone is crucial. If policymakers adopt a firm stance on inflation, even while holding rates steady, the pound could appreciate. Traders should consider call options on GBP/USD to capture this potential upside with limited risk. The futures market currently reflects only a 30% chance of another rate cut this year, indicating a more solid stance from the Bank as the likely scenario. Given the uncertainty about future rate cuts, we can also explore SONIA futures for early 2026. If we believe the Bank will hold off on cuts longer than expected due to persistent inflation, betting against rate cuts for that period could prove profitable. Rates have already decreased from the 5.25% peak in 2023, and officials now seem content to wait and see if their earlier measures are sufficient. Create your live VT Markets account and start trading now.

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