The Bank of England announced that it will keep the benchmark interest rate unchanged at 5% and maintain the overall pace of balance sheet reduction.

On Thursday, the Bank of England released its interest rate decision, declaring that the 5.0% interest rate will remain unchanged, in line with expected values.

Last month, the Bank of England lowered the benchmark interest rate from the sixteen-year high of 5.25% to the current 5.0%.

The Monetary Policy Committee passed the resolution with a vote of 8 to 1, contrasting sharply with the Federal Reserve's substantial interest rate cut of 50 basis points yesterday, but in line with the expectations of economists and the market.

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Bank of England Governor Andrew Bailey said in a statement, "We should be able to gradually lower interest rates over time, and it is crucial to keep inflation low, so we need to be careful not to cut rates too quickly or too much."

Ballinger Group foreign exchange analyst Kyle Chapman said that the Bank of England's 8 to 1 voting ratio "shows a more decisive and hawkish stance than expected," supporting UK government bond yields and boosting the pound.

At the same time, the Bank of England maintained the pace of balance sheet reduction, announcing that it will cut the bond purchase volume by £100 billion over the next 12 months.

After the news was released, the pound against the US dollar expanded its gains and rose to the highest level since March 2022, currently at £1.32.

The UK's 10-year government bond yield rose to 3.9%.

The cautious stance of the Bank of England has weakened the market's expectations for interest rate cuts by the end of the year.

The market currently expects a 44 basis point cut by the end of the year, compared to yesterday's expectation of 46 basis points.

At the same time, the Bank of England's reduction of £100 billion in government bonds is also in line with the expectations of economists and the market.

This means that the amount of UK government bonds it sells in the market will be significantly reduced from about £50 billion to £13 billion.

In addition, the Bank of England also holds £87 billion in UK government bonds, which will mature from October 2024 to September 2025.

Some analyses point out that in the next 12 months, due to the maturity of many bonds held by the Bank of England, the Bank of England's operational space for actively selling bonds will decrease.

The Treasury must make up for the fiscal losses brought about by the reversal of quantitative easing.

The speed of the reversal of quantitative easing may affect the budget plan formulated by the Chancellor of the Exchequer on October 30.

Currently, the Office for Budget Responsibility (OBR) makes fiscal forecasts based on the bond sales under the quantitative tightening policy in the past few years.

If it continues to predict based on the average value of the past, Chancellor Reeves will have an additional £3 billion in budget space.

However, if the Bank of England insists on reducing its asset size by £100 billion for the third year, the OBR can make new assumptions based on this faster pace.

Bloomberg Economic Research estimates that this will reduce the Chancellor's already limited budget space by £5.5 billion.

In addition, the Bank of England is planning a major balance sheet adjustment, trying to provide liquidity to the market through repurchase operations, rather than by directly purchasing assets.

Repurchase operations can help banks obtain funds when reserves are insufficient, avoiding market dependence on a large central bank balance sheet.

Recently, financial institutions have increasingly used the short-term repurchase tool provided by the Bank of England, borrowing about £44 billion last week through UK government bonds in exchange for cash.

After the financial crisis and the post-COVID-19 pandemic, the Bank of England has established a government and corporate debt balance sheet of up to £895 billion.

However, the Treasury's huge losses caused by the quantitative tightening policy have led to political scrutiny of the Bank of England's bond business.

The Office for Budget Responsibility estimates that the net loss for life may reach £104 billion, bringing a serious burden to public finances.

There are also concerns that the Bank of England's sale of bonds will lead to an increase in UK government bond yields, although the central bank's analysis indicates that this impact is relatively small.