A View from the Bridge - October 2025

There were few surprises from the Bank of England last Thursday with both the decision to hold rates at 4%, along with the 7-2 vote split (Dhingra and Taylor voting for a 25bp cut) widely anticipated. The market’s primary focus was squarely on the extent to which the pace of Quantitative Tightening (unwinding the gilt portfolio accumulated during the pandemic) would be reduced and the Bank duly delivered opting for a £30bn reduction over the next 12 months, meaning that the bank would reduce its gilt portfolio by £70bn via active gilt sales and maturity run off. The market was fully expecting a reduction in active sales of long dated gilts (some hoping for them to scrapped altogether) so the BOE’s shift from a 1/3 share (between Shorts, Mediums and Longs) to 1/5 share of active sales was greeted with mild disappointment and 30-year yields proceeded to end the day 5bp or so higher in yield.

This was not a forecast round for the BOE, the next quarterly Monetary Policy Report is on 6th November, alas still 3 weeks before the (opportunistically delayed!) budget. Therefore, outside of a sharp deceleration in published data for wages (14^th October) and inflation (22^nd October) markets are not holding out much hope for a move in rates before the end of the year. Although 2025’s final meeting on 18^th December gives the committee sufficient time to digest the immediate economic implications of the budget along with a further set of wage and inflation data, even if their model forecasts won’t be updated until February 5^th, 2026. So, we shouldn’t throw in the towel just yet on another 25bp cut before the festive season goes into full swing, especially as it’s widely anticipated that the occupant of Number 11 Downing Street will be taking on the role of Scrooge rather than Santa in the UK’s economic pantomime!

It is worth noting that 2-year SONIA rates (3.74%) are over 40bp above their US equivalents (3.32%) following the FOMC’s decision to cut 25bp at last Wednesdays meeting. Outside of the 2022 inflation surge and the Truss gilt crisis this has rarely been sustained over the past 20-years, adding further weight to the argument that UK policy remains quite restrictive. We continue to expect a bumpy ride down towards more neutral levels of 3.00-3.50% over the next 6-9 months.

Following the most recent rate cut in August, the market has revised its view on the pace of cuts with the next anticipated reduction to 3.75% being in February 2026 (42% likelihood). That said with the US Fed forecast to have 2 further reductions before the year end, there may be a bit of pressure on the Bank of England to do a bit of rethinking! As of today, the market is pricing a 2^nd cut sometime in the early summer with the familiar terminal rate of 3.5% priced by the middle of 2026.