Sterling, Gilt Yields Fall After BOE Holds Rates

By Renae Dyer and Miriam Mukuru

U.K. government bond yields and sterling fell after the Bank of England held interest rates steady at 3.75% and announced plans to overhaul its approach to reducing its balance sheet.

The central bank said there had been little evidence of second-round effects in wages and prices, although inflationary risks had increased since July and could rise further if energy prices remained elevated for longer.

The BOE voted 6-3 to keep rates unchanged with three policymakers preferring to raise rates by 25 basis points to 4.0%.

The decision was widely anticipated, although markets had priced a 24% chance the BOE could increase rates, according to LSEG data.

Sterling fell to a seven-week low of $1.3346 after the decision and the euro reached a one-week high of 0.8592 pounds, LSEG data showed. Ten-year gilt yields fell to 5.222%, down more than 7 basis points on the day, from 5.295%, according to Tradeweb. Thirty-year gilt yields dropped to 5.758%, down almost 10 basis points on the day, from 5.839% prior to the rate decision.

The BOE also announced an overhaul of its quantitative tightening policy, where it sells gilts as part of its program of shrinking its bond holdings.

The BOE announced a reduced pace of quantitative tightening to an average of 46 billion pounds a year until 2034, down from 70 billion pounds a year currently. The program will comprise 20 billion pounds of gilt sales annually alongside maturities.

"The move reinforces the bank's preference for a gradual and predictable balance-sheet unwind while maintaining Bank Rate as the primary policy tool," said Esther Watt, bond strategist at Evelyn Partners, in a note.

Data on Wednesday showed U.K. inflation accelerated to an annual rate of 3.1% in August from 2.9% in July, as expected by analysts, driven by higher energy prices. However, core inflation, excluding energy and food prices, remained at 2.6%, and services inflation was unchanged.

Meanwhile, the labor market remains sluggish with the ONS on Tuesday reporting a 39,000 fall in the number of payrolled employees in the three months ended July.

"Inflation has moved higher in recent months but much of that increase has been driven by external factors such as energy and fuel costs, while underlying inflation has remained more stable," Moneyfarm chief investment officer Richard Flax said in a note.

"Against a backdrop of modest growth and continued uncertainty, policymakers appear comfortable taking more time before making their next move."

The BOE's decision to maintain interest rates stands in contrast to the Federal Reserve and European Central Bank both raising rates by 25 basis points on Wednesday and last Thursday, respectively.

The market was pricing in a 64% chance that the BOE would raise rates in November after the decision, compared with 84% beforehand, according to LSEG. The market no longer fully priced four rate rises by next year.

Write to Renae Dyer at renae.dyer@wsj.com and Miriam Mukuru at miriam.mukuru@wsj.com

(END) Dow Jones Newswires

September 17, 2026 08:34 ET (12:34 GMT)