Official data on Friday showed public sector borrowing between April and August totalled 83.8 billion pounds

International News via Reuters:

The pound headed for its biggest two-day drop since late July on Friday, while bond yields rose, after a surge in UK public borrowing and a Bank of England rate decision that laid bare the challenge for policymakers in balancing growth and inflation.

Official data on Friday showed public sector borrowing between April and August totalled 83.8 billion pounds ($113.39 billion), 11.4 billion pounds more than forecast by the Office for Budget Responsibility earlier this year.

The surge compounds the problem finance minister Rachel Reeves faces with her November budget, in which she had already been expected to announce new tax rises to stay on track to meet her fiscal rules and avoid unsettling financial markets.

“The pound has sunk on this data, and is testing support at $1.35, it is the second-worst performing currency in the G10 FX space today,” XTB research director Kathleen Brooks said.

Sterling fell 0.5% to $1.349. It has lost almost 1.1% in the last two days alone, the largest such decline since July 31.

The BoE left interest rates unchanged on Thursday as expected and opted to reduce the pace of its government bond sales to minimise the impact on the more volatile longer-dated section of the market.

With inflation running at nearly double the central bank’s 2% target, the BoE has only limited scope to lower rates much more to help shore up the economy, where evidence is mounting of weakness in the labour market.

UK bond yields rose on Friday, with long-dated 30-year gilts up 4.3 basis points at 5.547%, pushing the premium over long-term borrowing costs in the United States to the highest in three years.

“A combination of gilt market stress and reversals on welfare reform has used up the thin margin for error in the government’s current spending plans, meaning taxes will almost certainly need to rise if the fiscal rules are to be met,” Matt Swannell, who is chief economic advisor to the EY ITEM Club, said.

Data on Friday showed retail sales rose by more than expected in August, thanks to sunny weather, although sales growth in July was revised down.

Yet this offered little comfort to bruised UK bonds or the currency.

A number of major retailers, including Primark owner Associated British Foods and budget supermarket Aldi UK, have signalled concern about the outlook for consumer spending given upcoming tax rises and a deteriorating jobs market.

“This is yet another disappointing piece of economic news which will add to Chancellor Rachel Reeves’s woes. But as we saw yesterday, the Bank of England dare not cut rates given that inflation is nearly double the official target of 2%, and likely to rise further,” Trade Nation senior market analyst David Morrison said.

Reporting by Amanda Cooper; Editing by Philippa Fletcher

The central bank kept its main interest rate on hold at 4% after August’s quarter-percentage-point cut, as expected

International News via Reuters:

The Bank of England slowed the pace of its programme to run down its government bond stockpile on Thursday and skewed sales away from long-dated debt in a bid to minimise the impact on volatile gilt markets.

The central bank kept its main interest rate on hold at 4% after August’s quarter-percentage-point cut, as expected.

The BoE bought 875 billion pounds ($1.19 trillion) of British government bonds between 2009 and 2021 to boost the economy, then started to reverse these purchases in 2022 in a process known as quantitative tightening, or QT.

Unlike other central banks, it has sold 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

Monetary Policy Committee members voted 7-2 to slow the pace at which the BoE unloads gilts to 70 billion pounds between October 2025 and September 2026 from 100 billion pounds over the past 12 months.

The decision was broadly in line with a median forecast of 67.5 billion pounds in a Reuters poll of economists and will reduce the BoE’s main government bond holdings to 488 billion pounds by October 2026.

“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 QT slowdown is the first since the BoE started to unwind its gilt holdings in February 2022. Bailey said QT was needed to restore room for future stimulus and reduce potential distortions in financial markets.

Thursday’s vote also represented the first split by policymakers on the pace of QT.

BoE Chief Economist Huw Pill voted to keep it at 100 billion pounds a year, saying the impact on markets was small. Catherine Mann called for a 62 billion-pound reduction.

The BoE said sales would be split 40:40:20 between short-, medium- and long-dated gilts, based on their initial purchase price. Mann said she wanted to continue with an even split.

Britain’s Debt Management Office has already largely shifted gilt issuance to short- and medium-dated bonds due to a fall in pension funds’ appetite for long-dated debt and global factors that have raised the cost of long-term borrowing.

Long-dated gilt yields hit their highest since 1998 this month, making it harder for finance minister Rachel Reeves to meet her own rules when she delivers 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 gilt yields initially edged lower after the decision before a rise in U.S. Treasury yields lifted 10-year gilt yields to a two-week high.

Vivek Paul, chief UK investment strategist at major fund manager BlackRock, predicted upward pressure on long-term gilt yields before the budget, given the government’s difficulty cutting welfare spending.

“Policymakers hope these actions will help limit the UK-specific pressure on long-dated yields just as international buyers of long-term bonds are becoming more risk-conscious than ever,” he said.

BOE FORECASTS INFLATION WILL HIT 4%

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

The BoE maintained its forecast that inflation would peak at 4% this month before falling back only slowly to its 2% target by the second quarter of 2027. It nudged up its economic 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.

Speaking later to broadcasters, he said he thought there would be “some further reductions” to borrowing costs but “the timing and scale is more uncertain”.

Deputy Governor Clare Lombardelli – who opposed last month’s rate cut – also said the central bank thought rates “are on a downward path”.

The economists polled by Reuters last week forecast a quarter-point rate cut in November or December and another early next year. By contrast, financial market rate futures show only around a one-in-three chance of a move this year.

“Sticky inflation and subsiding labour market weakness should dissuade the MPC from easing,” said Simon Dangoor, head of fixed income macro strategies at Goldman Sachs Asset Management. “However, a budget deemed to weigh further on UK growth prospects could prompt a swift response.”

Finance minister Reeves is expected to raise taxes in her budget to stay on course to repair the public finances.

($1 = 0.7339 pounds)

Editing by Catherine Evans