By David Milliken
LONDON (Reuters) -The Bank of England looks set to slow on Thursday the 100 billion-pound-a-year pace at which it reduces its government bond holdings following increased volatility in bond markets, while keeping its main interest rate on hold.
Although the BoE views the pace of quantitative tightening as having little impact on the economy, the annual decision on its bond sales is closely watched by financial markets, where some blame it for pushing up British government borrowing
costs.
A Reuters poll showed economists expect the Monetary Policy Committee to slow the pace to a median 67.5 billion pounds ($92.2 billion) - a bigger drop than the fall to 72 billion pounds in the Bank of England's own poll in August.
The analysts were unanimous that the BoE would keep rates on hold at 4% after last month's cut, its fifth reduction since August 2024 - in contrast to the U.S. Federal Reserve's decision on Wednesday to cut rates by a further quarter point.
"We think the Bank of England meeting that concludes Thursday will be hawkish rates but may well surprise dovish on its QT plans for the next year," said Krishna Guha, vice chairman of U.S. investment bank Evercore ISI.
The BoE could well slow QT by more than expected to 60 billion pounds or skew its sales towards shorter-dated gilts, he added.
The BoE is alone among major central banks in conducting outright sales of the government bonds it bought to boost the economy in the years after the 2008 global financial crisis, rather than just letting them mature.
Earlier this month, 20- and 30-year gilt yields rose to their highest since 1998. This reflected a global move upward in borrowing costs, but one which critics say has been exacerbated in Britain by QT and has put added pressure on Finance Minister Rachel Reeves before her November 26 budget.
The BoE estimated last month that QT had only added 0.15 to 0.25 percentage points to government borrowing costs.
INFLATION SOON TO HIT 4%
British government borrowing costs and inflation are both the highest in the Group of Seven advanced economies. The BoE forecasts inflation will peak at 4% this month before slowly returning to target by mid-2027.
August's rate decision only passed by a narrow 5-4 majority and economists expect the BoE to vote 7-2 to keep rates on hold this month as they wait for signs that underlying inflation pressures from the labour market are definitely fading.
Data published on Wednesday showed inflation in August held at 3.8%, the highest in 19 months and almost double the BoE's 2% target.
Governor Andrew Bailey said this month that there was now "considerably more doubt about exactly when and how quickly" the BoE could reduce rates further - a message which he believed markets had taken on board.
Interest rate futures on Wednesday only showed a 30% chance of another rate cut this year.
However, the Reuters poll showed a majority of economists still expected another rate cut in November or December, with a further cut in the first quarter of next year.
Evercore ISI's Guha said that he did not think Britain's labour market was slowing at a sufficiently rapid pace to offset the majority of policymakers' inflation concerns.
"There is still a slender chance of a December cut if the November UK budget is very contractionary. But in the base case the BoE is on hold now some distance into 2026," he said.
($1 = 0.7319 pounds)
(Reporting by David Milliken; Editing by Jamie Freed)
