UK Gilts and the Bank of England — 2026-09-18
The Bank of England (BoE) has halted sales of long-dated gilts and paused active quantitative tightening (QT) for six months, triggering a sharp drop in borrowing costs. This strategic pivot, announced alongside a vote to hold interest rates at 3.75%, aims to stabilize the bond market after yields hit multi-decade highs, with the central bank now planning to unwind its £488 billion gilt portfolio over eight years.
UK Gilts and the Bank of England — 2026-09-18
Top developments
BoE Scraps Long-End Gilt Sales in Major QT Overhaul
On September 17, 2026, the Bank of England announced it would halt the sale of 20-year and 30-year gilts entirely and pause all active gilt sales for six months while it reviews its Asset Purchase Facility (APF) strategy. The MPC voted unanimously to reduce the pace of QT, setting a new target to unwind the remaining £488 billion portfolio by 2034 at an average annual pace of £46 billion. This decision directly addresses the market turmoil caused by previous aggressive sales, which had pushed 30-year yields to their highest levels since 1998.
Borrowing Costs Plunge Following BoE Intervention
Thirty-year gilt yields fell by more than 0.1 percentage points immediately following the announcement, marking the largest single-day decline since May 2026. The move provides immediate relief to the UK government’s financing costs, which had been under severe pressure due to a global bond selloff and domestic fiscal concerns. By removing the BoE as a seller of long-dated debt, the central bank has effectively supported the long end of the curve, a segment heavily influenced by pension fund demand and LDI (Liability Driven Investment) strategies.
MPC Votes 6-3 to Hold Rates at 3.75% Amid Inflation Warning
The Monetary Policy Committee (MPC) maintained the Bank Rate at 3.75% on September 17, despite three members voting for a hike to 4.0%. The decision came as the BoE projected UK inflation could top 4% early next year, driven by rising energy costs. This divergence in voting highlights the tension between controlling inflation and supporting a fragile economic recovery, with the central bank signaling a cautious approach to further tightening.
Fiscal Pressure Mounts Ahead of October Budget
Chancellor John Healey faces a challenging fiscal backdrop as long-term borrowing costs remain historically elevated, potentially halving the headroom available for his upcoming budget. Although yields have eased from their peak, the cost of servicing debt remains a significant constraint on public spending plans. The OBR’s October forecasts are expected to reflect these higher interest rates, complicating the government's efforts to meet its fiscal rules without raising taxes or cutting services.
Local view
The Daily Telegraph reported that the BoE's decision was viewed as a necessary "overhaul" to prevent further damage to the bond market, noting that the halt on long-dated sales was a direct response to the "turmoil" seen earlier in September. Meanwhile, Saxo Bank analysts noted that while the pound weakened slightly against major currencies, the primary market reaction was focused on the steepening of the yield curve as short-term rate hike expectations receded.
Context & numbers
- Gilt Portfolio Size: The BoE currently holds approximately £488 billion in UK government bonds under the APF.
- QT Pace: The new unwind plan targets an average reduction of £46 billion per year through 2034.
- Yield Movement: 30-year gilt yields dropped by over 10 basis points (0.1%) on the announcement day.
- MPC Vote: 6 members voted to hold rates; 3 voted for a 25bps increase.
- Inflation Forecast: The BoE now expects CPI to exceed 4% in early 2027.
On the radar
- DMO Auctions: Investors are watching for the next DMO gilt auctions to see if the reduced BoE supply leads to tighter bid-to-cover ratios or lower tails.
- October Budget: Chancellor Healey’s first budget is due at the end of October, where he must address the increased debt service costs highlighted by this week's volatility.
- LDI Demand: With the BoE out of the long end, pension funds and LDI managers will likely become the dominant marginal buyers, potentially stabilizing prices but also concentrating risk.
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