The Bank of England is expected to slow the pace of reducing its government bond holdings this week, while keeping its main interest rate on hold. The central bank has been reducing its gilt holdings at a rate of $100 billion per year since 2022, bringing the total down from $1.2 trillion to $760 billion. Although the Bank of England views the pace of quantitative tightening as having little impact on the wider economy, it is closely watched by financial markets, where some blame it for pushing up British government borrowing costs.

The Bank of England is unique among major central banks in conducting outright sales of government bonds, rather than just letting them mature. Since 2022, the Bank has reduced its gilt holdings by $440 billion, with $100 billion of that reduction coming in the past year. A Reuters poll showed economists expect the Monetary Policy Committee to slow the pace of reduction to a median $67.5 billion per year.

British 30-year government bond yields have hit their highest level since 1998, while new 10-year debt sold at the highest yield since 2008, putting pressure on finance minister Rachel Reeves ahead of her November 26 budget. However, the Bank of England estimated last month that its quantitative tightening to date had only added 0.15-0.25 percentage points to British government borrowing costs.

The Bank’s aim is to remove excess cash that has built up in Britain’s financial system due to quantitative easing, but it is unclear what the neutral level is. A Bank survey of banks gave a range of $420-$580 billion, compared with a current level of around $760 billion. The Bank would need to reduce the pace of quantitative tightening to $49 billion per year to end active sales completely and achieve quantitative tightening solely by gilts maturing.

The decision comes as British inflation remains high, at 3.8% in July, the highest in the Group of Seven advanced economies. The Bank of England cut rates for the fifth time in just over a year last month, but by a narrow five-four margin. The Monetary Policy Committee’s decision on quantitative tightening will be closely watched by financial markets and will have significant implications for the British economy.