On September 17, the Bank of England announced its policy rate decision and a multi-year plan for reducing its holdings of UK government bonds under the asset purchase facility. The policy rate remained at 3.75%, with the Monetary Policy Committee voting 6-3, while three members advocated for an increase to 4%. The interest rate result itself was close to the majority's pricing; what truly rewrote supply and demand expectations was the quantitative tightening path: approximately £488 billion of government bonds were split into three parts, active auctions were suspended, the sale of ultra-long-term bonds to the market was halted, and discussions were held with the Treasury's Debt Management Office regarding direct transfer at market prices. On the same day, the yield on 10-year US Treasury bonds fell to approximately 4.94%, about 6 basis points lower than the previous trading day's approximately 5.00%; the yield on 10-year UK government bonds fell to approximately 5.22%, the yield on 30-year government bonds fell by about 12 basis points to approximately 5.74%, and the yield on 2-year government bonds fell to around 4.70%. The Middle East conflict pushed up energy prices, and the UK's consumer price index rose 3.1% year-on-year in August. The central bank pointed out that inflation risks have shifted further to the upside compared to the July report, and the updated short-term path shows that inflation may be slightly higher than 4% in early 2027. The market is first digesting the supply structure of government bonds, rather than the probability distribution of adding another 25 basis points.

Policy interest rates remained unchanged, and inflation risks continued to rise.

The Bank of England maintained its interest rate at 3.75%. Chief Economist Peale, External Committee members Green and Mann remained in favor of raising rates to 4%. Most committee members emphasized that energy prices have risen further since July, increasing the near-term inflation path, but evidence of a second round of transmission in wages and pricing remains limited. A loose labor market and tightening financial conditions will exert a lagged constraint on prices. Governor Bailey stated after the decision that financial conditions will continue to exert downward pressure on inflation, making the current rate maintenance appropriate; however, if the Middle East conflict persists for a long time, the risk of a second round of effects will increase, and policy tightening may be necessary. Deputy Governor Lombardley also pointed out that the energy outlook remains uncertain, and the longer the conflict drags on, the stronger the case for raising rates becomes. The central bank also raised its third-quarter growth estimate to 0.4%, but revised its inflation peak path upward from approximately 3.2% in the July report to slightly above 4% by early 2027. Among the G7 countries, only the Bank of England and the Bank of Canada have not raised interest rates since the escalation of the Middle East conflict. The Bank of Canada's policy rate remains at 2.25%, facing another set of constraints: the energy shock and trade uncertainty. The European Central Bank raised its deposit facility rate this month, and the Federal Reserve raised its target range for the federal funds rate by 25 basis points to 3.75% to 4.00%. The Bank of England, therefore, appears more cautious on its interest rate path, but has historically been more aggressive in its balance sheet exit strategy. This adjustment is precisely a rewriting of its "aggressive reduction" into an executable multi-year timetable.

Quantitative tightening has been rewritten as a hold-to-maturity plus fixed-amount sales approach.

The Asset Purchase Facility currently holds approximately £488 billion of UK government bonds (at purchase cost), having peaked at nearly £875 billion to £895 billion. The Monetary Policy Committee unanimously decided that the stock of government bonds used for monetary policy purposes will be reduced to zero by the end of 2034, an average annual reduction of approximately £46 billion, with £20 billion from active sales annually and the remainder rolled over upon maturity. The implementation team subsequently provided a bond allocation: approximately £222 billion of government bonds maturing before 2035 will be held to maturity; approximately £120 billion of ultra-long-term government bonds will be retained as indirect assets for cash issuance, with the initial source being a portion of the retained portfolio; and the remaining approximately £146 billion of government bonds maturing between 2035 and 2049 will be phased out at a rate of £20 billion per year. The previous year's reduction was approximately £70 billion, indicating a significant slowdown in the new approach, but active sales remain largely around £20 billion. The change primarily stems from a decrease in maturing bonds, rather than a sudden disappearance of auctions. Bailey stated, "Today we have provided a clear plan for the future of quantitative tightening." "The Monetary Policy Committee and the Bank of England have decided to temporarily refrain from selling a significant portion of the government bonds held for monetary policy purposes, with the remainder to be phased out over the next eight years." He also emphasized that the plan had been internally prepared before the outbreak of the Middle East conflict and was not an immediate response to market conditions at the time. The Bank of England itself estimates that the cumulative quantitative tightening has raised the yield on 10-year UK government bonds by approximately 20 to 30 basis points. Stopping the sale of ultra-long-term bonds and fixing the pace of medium- and long-term sales directly reduces the duration supply that the market must absorb over the next few years.

The implications of auction suspension and transfer to the Debt Management Office

The voluntary auction will be suspended for approximately six months, with progress resuming by April 2027. If approved, the Ministry of Finance will instruct the Debt Management Agency to purchase the Treasury bonds to be sold under the Asset Purchase Facility at market price and according to pre-announced rules. The Debt Management Agency will then decide whether to redeem, replace, or adjust the issuance maturity. The logic is not complicated: the central bank's balance sheet is concentrated on the long end where demand is weak, while the Debt Management Agency can arrange financing in the short end where demand is stronger, thus avoiding two public sector sellers simultaneously investing in the same curve. Regardless of whether the final transaction is through auction or transfer to the government, the implementing body must implement the annual sales volume determined by the committee. The accounting framework remains unchanged: as long as the market value of Treasury bonds under the Asset Purchase Facility is lower than the corresponding reserve liability cost, the Ministry of Finance must still make up the difference to the central bank quarterly. What has changed is the timing of the loss realization. Holding to maturity reduces the immediate realization from selling at market price, thus narrowing the space for criticism that "selling bonds itself depresses prices," but interest costs and valuation gaps will still enter the fiscal account. The committee minutes state that members discussed the overlap between fiscal and monetary operations, as well as the committee's decision-making independence. The conclusion was that a multi-year path could facilitate the exit from quantitative easing while maintaining monetary policy independence. Regarding the idea of transforming the central bank into a structural buyer of UK government bonds, the arrangement also clearly sets an upper limit: the permanently retained portfolio corresponds only to cash issuance, amounting to approximately £120 billion, rather than prematurely halting quantitative tightening before 2034.

The substantive meaning of supply structure, curves, and fiscal accounts

For the yield curve, the ultra-long end has lost a continuous official seller, while the medium and medium-to-long-term ends still need to absorb the annual fixed supply of £20 billion. The short end may see increased net issuance due to the Debt Management Office's rescheduling of maturities. This is a redistribution of supply by maturity, not a disappearance of the total supply. The decline in yields on 10-year and 30-year UK government bonds after the announcement is an immediate price-indication of the "withdrawal of official supply at the long end," and cannot be extrapolated to the subsequent path. Three things need to be closely monitored: whether the transfer scheme before April 2027 can be included in the Debt Management Office's annual financing mandate; how the held-to-maturity portfolio can amplify the Treasury's supplementary payments during yield fluctuations; and whether interest rate tools will once again override balance sheet arrangements if energy prices continue to follow the unfavorable scenario outlined in the July report. Bailey has long argued that quantitative easing has a positive net effect after full-cycle accounting, but convincing Parliament and the public has not automatically decreased simply because fewer long-term bonds have been sold. Pushing quantitative tightening to the "backstage" requires that the rules be firmly written, the sellers be unified, and the accounting standards no longer be rewritten by quarterly auctions. Whether the rules can withstand the next energy shock and financing boom depends on the review in the spring of 2027, not on the extent of the yield decline on September 17.