BoE Holds Rates, Overhauls QT Policy in Surprise Move

The Bank of England maintained its interest rates at 5%, as widely anticipated by analysts. However, the central bank's decision was accompanied by a significant overhaul of its quantitative tightening (QT) policy. Under the revised plan, sales of long-dated Gilts will be paused in some areas and permanently held on others.

The new framework involves holding £146 billion worth of Gilts maturing between 2035 and 2049 at a pace of £20 billion per year. These bonds will be transferred directly to the government through the Debt Management Office, rather than being auctioned into the market as previously done. As a result, the 30-year Gilt yield fell by 12 basis points.

The overhaul has significant implications for fixed-income markets and sterling derivatives. MUFG believes that the revised QT policy will lead to a flatter Gilt yield curve, with long-end risks receding. The firm recommends positioning for this outcome, particularly in interest rate swaps and options trading.