Market Update - BoE holds steady, slows QT to ease gilt pressures

Highlights: The Bank of England (BoE) held the bank rate at 4 per cent in its September meeting with a 7-2 vote, with two members preferring a 25bps cut. Importantly, the MPC gave no pushback against market pricing for a possible cut in November, leaving the door open, if inflation continues to moderate. At the same time, the BoE slowed the pace of Quantitative Tightening (QT) to GBP70 billion for the next 12 months, with a tilt away from selling longer-dated gilts, in recognition of recent market strains. The key call for the BoE was to weigh inflation expectations against downside risks to growth. For investors, the BoE’s stance was as expected: restrictive enough to keep inflation on course toward target, but pragmatic enough in avoiding further stress in gilt markets.

• The BoE’s policy stance looked clear as the members voted by 7-2 to hold rates at 4.0 per cent, with two dissenters (Dhingra, Taylor) arguing for a 25bps cut. The MPC did not challenge market pricing of a 15-20 per cent chance of a November cut, suggesting the bar for easing is not high if data softens further
• The Bank also slowed its pace of Quantitative Tightening, planning to reduce gilts by GBP70 billion over the next 12 months, rather than the GBP100 billion previously suggested. Crucially, it will sell fewer long-dated bonds, responding to the recent surge in 30-year gilt yields, which hit the highest in almost 30 years
• With downside risks prevalent and a lingering uncertainty to UK fiscal policy, we stay neutral on UK equities and GBP/USD
• The decision is not a game-changer to our overweight stance on UK gilts, especially in medium-to-long maturities, with slower QT easing supply pressures and growth still weak. Also, the valuations look compelling against a backdrop of slowing inflation and weakening growth. While fiscal policy under a Starmer-led government could raise issuance pressures, we believe that falling inflation prints and the BoE’s dovish lean will support duration. Gilts remain one of the most attractive sovereign bond markets in developed economies, offering positive real yields with policy likely to turn supportive in the second half