Bank of England Faces Bond Shock Conundrum Amidst Rate Decision

The Bank of England is facing a delicate balancing act as it navigates the global bond shock. The rise in UK yields poses a significant challenge for the Bank's policymakers, who will make their next decision on UK interest rates on September 17.

A recent study by Prof Costas Milas and co-authors found that quantitative tightening (QT) policies add up to 0.4 percentage points to UK yields but reduce UK inflation by as much as 1.4 percentage points.

The Bank's Monetary Policy Committee is likely to slow down the current pace of £70bn in annual sales of government bonds, which could relieve pressure on UK borrowing costs but also make it more difficult for UK inflation to revert quickly to the Bank's 2% target.