The Bank of England will hold its monetary policy meeting on September 18th. The market generally expects that the Bank Rate will remain unchanged at this meeting, and the focus will be on the pace of quantitative tightening (QT). The following is a detailed preview of the meeting:



Interest rates remain unchanged

According to a Reuters survey, 67 economists unanimously expect the Bank of England to keep its base rate unchanged at 4.00% on September 18. Inflation has recently climbed to nearly double the Bank of England's 2% target, with forecasts indicating it will reach 4% in September and may not return to target until mid-2027. High inflation keeps the threshold for a rate cut high.

The vote is expected to be 7-2

The Monetary Policy Committee (MPC) is expected to see a narrowing of its internal divisions, with a 7-2 vote expected. Members Taylor and Dhingra are likely to support a rate cut, focusing on downside risks to economic growth and the labor market, while other members may be more inclined to balance inflation and growth considerations due to rising inflation risks.

The pace of quantitative tightening has attracted much attention

Markets expect the Bank of England to slow its quantitative tightening program from £100 billion annually to either £75 billion or £50 billion over the next 12 months. A reduction to £50 billion would halt active government bond sales, as around £50 billion of bonds are maturing. A target of £75 billion would increase active sales to £26 billion, with the mix likely to tilt more towards shorter-term government bonds.

Policy guidance remains unchanged

Most MPC members believe that current policy is restrictive and are expected to reiterate their guidance for a "gradual and cautious" easing approach. Given the upward risks to inflation, caution is still needed in determining the timing of a rate cut. The Bank of England may hint at a November rate cut through its language, but only if inflation and wage growth data support an easing policy.

Fiscal policy affects economic outlook

The direction of fiscal policy in November will have a significant impact on the economic outlook. The MPC has shifted its focus from trade and tariff risks to fiscal policy, focusing on the extent of spending cuts and tax increases. Budget-related expectations are already influencing the economy and the labor market, and clarity on the budget outcome could pave the way for interest rate cuts early next year.

Quantitative tightening and UK government bond sales attract attention

In addition to interest rate decisions, voting results, and policy guidance, the pace of quantitative tightening will be a key focus of the meeting. The Debt Management Office (DMO) has alleviated the imbalance between supply and demand for long-term government bonds by reducing supply, and the Bank of England may take similar measures by adjusting the scale of its active government bond sales. There are two possible scenarios for quantitative tightening:

£150 billion scenario: The Bank of England reduces the scale of quantitative tightening from £100 billion to £50 billion over the next 12 months, which means that active government bond sales will be suspended due to the amount of bonds maturing by around £50 billion.

GBP275 billion scenario: Quantitative tightening is set at GBP75 billion, with active sales increasing to GBP26 billion (up from GBP13 billion this year), with the sales mix likely to be more skewed towards shorter-dated government bonds.