In gilts, the headline is not the rate call - it is what happens to the BOE's bond sales. As Mizuho's Evelyne Gomez-Liechti put it, "QT is the bigger market event." Her base case is a move to passive-only QT, which would support gilts.
A Telegraph report this week fanned chatter that the central bank could stop selling long-dated bonds altogether. Any pullback in supply would be a positive for prices, but the key debate is how far the BOE is willing to go.
The QT program is the unwind of the pandemic-era gilt buying. Those sales have drawn scrutiny for potentially adding fuel to the selloff that pushed the UK's long-term borrowing costs to highs last seen in 1998, squeezing the government's fiscal room ahead of a budget next month.
Pressure has been most intense at the long end. Morgan Stanley's Fabio Bassanin and Luca Salford argue that heavy issuance and shrinking BOE holdings have hit longer maturities harder as pension demand has faded, and they estimate QT has added 70 basis points to 30-year yields. Sales of long-dated gilts are also happening below the BOE's purchase prices, which is costing the government billions.
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In a recent BOE survey of market participants, the median view was for balance sheet runoff to slow to £50 billion in the year starting October, which implies roughly £20 billion of active gilt sales. Some expect the BOE to go passive-only, others say it could keep the current approach.
Since February 2022, the BOE has cut its holdings to £489 billion, down from close to twice that amount. It intends to sell the entire stock, guided by three principles: interest rates stay as the MPC's main tool, sales should not impair market functioning, and the process should be gradual and predictable. A common barometer of supply anxiety - the spread between 30-year gilts and similar-maturity swaps - has largely held flat this year despite rising yields.
External shocks could swamp any tweak to QT. The market still has to process risks like the conflict in the Middle East lifting oil prices and stoking inflation concerns, which is why any halt to gilt sales might only have a limited effect.
There is also the independence angle. Others caution that tailoring the sale plan to fiscal needs might prompt doubts over the BOE's independence. Citigroup's Jamie Searle said that while a change is possible, he suspects "the status quo to avoid blurring monetary policy control of QT."
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