Bank of England Keeps Rates Steady Amid Quantitative Tightening Overhaul

The Bank of England kept its benchmark interest rate unchanged at 3.75%, in line with market expectations, and warned that if Middle East tensions intensify inflationary pressures may require further rate hikes.

The Monetary Policy Committee voted 6-3 to keep rates steady, with Governor Andrew Bailey stating the global energy shock has had a limited impact on UK prices and wages so far. However, he noted that prolonged volatility would increase its drag on inflation and necessitate higher interest rates.

Bond investors were more focused on the Bank's quantitative tightening (QT) program, which was overhauled to reduce the £488 billion bond portfolio by 2034. The plan includes retaining long-term government bonds maturing in 2049 or later and selling remaining bonds at a pace of £20 billion per year.

The market reacted positively to the new QT plan, with UK long-term government bonds rallying as the 30-year yield fell 5 basis points to 5.80%. The Bank's decision to slow balance sheet reduction more than expected may slightly erode Chancellor John Healey's fiscal buffer.