BoE Holds Rates, Pauses Gilt Sales; UK Bond Yields Slide

Britain's government bond market rallied sharply on Thursday after the Bank of England left interest rates unchanged and announced a six-month pause in bond sales under its quantitative tightening programme.

The central bank's rate-setting panel voted 6-3 to hold rates at 3.75%, matching analyst expectations. Policymakers also unveiled a longer-term framework for unwinding its roughly £500 billion ($670 billion) stock of bond holdings, including a halt to active sales until April and a permanent end to disposals of long-dated bonds.

Gilts climbed after the decision, with longer-dated paper leading the move. The 30-year yield was headed for its largest one-day drop since May, falling 11 basis points to 5.75%, having earlier in the week touched 5.96% — its highest level since 1998. The benchmark 10-year yield shed 7 basis points, while the two-year yield, which is more attuned to rate expectations, slipped 4 basis points.

"Reducing gilt sales and then abolishing totally for the long-end is absolutely a positive," said Mohit Kumar, chief European economist at Jefferies. "They have effectively changed the supply-demand picture, particularly for longer-dated gilts."

The rally followed a global bond selloff that had driven yields to multi-decade highs. In its accompanying outlook, the Bank said inflation would exceed 4% next year, and Governor Andrew Bailey cautioned that a prolonged conflict in the Middle East could necessitate higher borrowing costs.

Sterling weakened 0.1% against the dollar to $1.335, a seven-week low, while the FTSE 100 traded up 0.5%. Money markets continued to fully price in a rate increase this year, assigning a 75% probability to a November move and pencilling in almost four quarter-point hikes by the end of 2027.