Bank of England shifts policy stance as pound faces headwinds

The British pound, which has recently outperformed other major currencies, faces potential headwinds due to shifting monetary policy expectations and fiscal uncertainty. While a resilient UK economy and previous aggressive interest rate hikes by the Bank of England (BoE) supported the currency, recent communications suggest a pivot toward a more cautious, dovish stance as policymakers weigh inflation control against economic stability.

Simultaneously, the Bank of England has revised its estimates regarding the impact of quantitative tightening (QT) on gilt yields. Deputy Governor Dave Ramsden reported that the campaign to shrink the Bank’s balance sheet has pushed 10-year gilt yields up by an estimated 20 to 30 basis points, an increase from previous estimates of 15 to 25 basis points. Despite this upward revision, the Bank noted that QT accounts for only about 6% to 9% of the total rise in gilt yields since the program began in February 2022.

The Monetary Policy Committee has also adjusted its targets, reducing the annual gilt stock reduction goal from £100 billion to £70 billion for the year ending September 2026. This move is intended to avoid disrupting market functioning, maintaining the Bank Rate as the primary tool for economic steering.