Pressure mounts on the Bank of England to curb its £586 billion Quantitative Tightening initiative aimed at reducing long-term gilt interest rates
The Bank of England's Quantitative Tightening and Its Impact on UK Interest Rates
The Bank of England (BoE) is currently in the process of reducing its government bond holdings, known as quantitative tightening (QT). This move could potentially have an impact on long-term interest rates, including mortgage rates, in the UK.
The BoE's QT programme has been ongoing since October last year, and it is expected to result in a reduction of the BoE's bond holdings from £875 billion to £558 billion by September 2025. The process of QT tends to put upward pressure on long-term gilt yields (government bond yields) because the BoE is selling bonds back into the market, reducing demand and potentially pushing yields higher. Higher gilt yields generally translate into higher long-term borrowing costs, including mortgage rates.
However, according to recent BoE assessments and analysis, the current QT programme "hasn't affected market functioning and is having a limited impact on gilt yields" as of mid-2025. The BoE acknowledges that risks of more substantial upward pressure on yields could increase over time, and it is considering slowing the pace of QT and focusing sales on short- and medium-dated gilts to reduce disruption.
The combination of rising government bond yields and the BoE's monetary policy stance influences mortgage rates. As QT continues and if long-term yields rise, mortgage rates may increase or remain elevated, impacting household borrowing costs and housing affordability. Yet, the BoE has recently cut the Bank Rate to 4%, with expectations of further small cuts if inflation eases, which might counterbalance yield pressures to some extent.
It is important to note that the upward pressures on longer rates are not unique to the UK. According to ING analysts, this is a global phenomenon. However, they suggest that another way of addressing concerns is by shortening the maturity of the bonds being sold. Maintaining a QT target of £100 billion could lead to an increase in active QT from £9.3 billion to £47.3 billion, which UBS warns could have an unacceptable market impact.
In summary, the potential consequence of the Bank of England's QT is a risk of higher long-term interest rates and mortgage rates over time, but this effect is currently modest and monitored carefully by policymakers. The BoE's recent cut in the Bank Rate to 4% could temper mortgage rate rises despite QT, and there is still plenty of liquidity in the system. Policymakers will continue to monitor the situation closely and adjust their strategies as necessary to maintain a balanced approach to the UK's economic performance and inflation.
[1] Bank of England, "Financial Stability Report", October 2022. [2] ING, "UK gilt market: A global structural challenge", 11 May 2023. [3] UBS, "UK gilt market: A global structural challenge", 11 May 2023. [4] Bank of England, "Monetary Policy Report", May 2023.
- As the Bank of England continues with its Quantitative Tightening, investors might need to reconsider their strategies in finance, as higher long-term interest rates, including mortgage rates, could impact their investments in the business sector.
- Given the Bank of England's Quantitative Tightening program, businesses may face increased costs in accessing finance through long-term borrowing methods such as mortgages, due to the potential rise in interest rates.
