Bank of England slows pace of bond rundown and keeps rates on hold

By David Milliken and Suban Abdulla

LONDON, Sept 18 (Reuters) - The Bank of England slowed the pace of its programme to run down its stockpile of government bonds for the first time on Thursday and skewed sales away from long-dated debt to minimise the impact on volatile gilt markets.

The British central bank also kept its main interest rate on hold at 4% after last month's quarter-percentage-point cut, as had been expected, and nudged up its economic growth forecast for the third quarter.

The BoE bought 875 billion pounds ($1.19 trillion) of British government bonds between 2009 and 2021 to boost the economy and started to reverse these purchases in 2022.

Uniquely among major central banks, it has been selling bonds outright as well as letting them mature, something critics say contributed to 30-year gilt yields hitting a 27-year high this month.

POLICYMAKERS SPLIT ON PACE OF BOND STOCK RUNDOWN

Policymakers voted 7-2 to slow the pace at which it unloads gilts to 70 billion pounds between October 2025 and September 2026 from 100 billion pounds over the past 12 months, broadly in line with a Reuters poll median forecast of 67.5 billion pounds.

"The new target means the MPC can continue to reduce the size of the Bank's balance sheet in line with its monetary policy objectives while continuing to minimise the impact of gilt market conditions," Governor Andrew Bailey said.

The slowdown is the first since the BoE started in 2022 to unwind its gilt holdings, and also saw policymakers split on the pace of the reduction sales for the first time - although the MPC had previously disagreed on the pace of purchases.

BoE Chief Economist Huw Pill voted to maintain the pace at 100 billion pounds - viewing the impact on markets as small - while MPC member Catherine Mann called for a faster reduction of 62 billion pounds.

The BoE said that over the next year, sales would be split 40:40:20 between short-, medium- and long-dated gilts on an initial purchase price basis, compared to an even split in previous years.

Long-dated gilt yields hit their highest since 1998 at the start of this month, putting pressure on finance minister Rachel Reeves ahead of her November 26 budget.

"The decision to slow the pace ... should help ease some of the pressure on the UK bond market in the run-up to the budget," said Yael Selfin, chief economist at KPMG UK.

Sterling weakened against the dollar and 30-year gilt yields edged lower after the decision.

The 7-2 vote to keep interest rates at 4% after last month's reduction was in line with expectations in a Reuters poll. MPC members Swati Dhingra and Alan Taylor kept up their call for lower rates.

The BoE maintained its forecast that inflation would peak at 4% this month and slowly fall back to its 2% target by the second quarter of 2027, and nudged up its growth forecast for the third quarter to 0.4% from 0.3%.

"Although we expect inflation to return to our 2% target, we're not out of the woods yet so any future cuts will need to be made gradually and carefully," Bailey said.

Before Thursday's decision, markets priced in only around a 32% chance of a further rate cut this year, but after the decision the probability moved up slightly to 37%, according to LSEG data.

"Sticky inflation and subsiding labour market weakness should dissuade the MPC from easing. However, a budget deemed to weigh further on UK growth prospects could prompt a swift response," said Simon Dangoor, head of fixed income macro strategies at Goldman Sachs Asset Management, predicting the BoE's next rate cut would be in February.

($1 = 0.7339 pounds)