The Bank of England made one terrible decision today, and hinted that it will make another the next time it meets. The chances of increased economic and financial stress in the UK grew considerably as a result, and I would even suggest that they have now put us on the path to another financial crash.
The terrible decision to come is that they gave the clearest possible hint that they will increase interest rates the next time they meet. As they put it:
Today, we've held Bank Rate at 3.75%. So far, higher global energy costs have had a limited effect on price and wage setting in the UK. But the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise Bank Rate to ensure that inflation falls back to our 2% target.
On this occasion, three of the nine committee members wanted to increase rates now, but the remaining six prevented them from doing so, while making it clear that if inflation does increase in this country, they will have no hesitation in doing so. Since the current trajectory of fuel prices guarantees that this inflation increase will happen, it must consequently follow that there will be an inevitable interest rate rise in November. This will be disastrous for the UK and most households within it, but will maintain the well-being of the wealthy, banks, and larger companies without ever solving inflation or addressing any of the underlying economic problems within the UK economy. There will be a video to come on this issue tomorrow morning.
The Bank's terrible decision today is recorded in its minutes. They agreed, with regard to quantitative tightening, that:
The Chair invited the Committee to vote on the propositions that the Bank of England should reduce the stock of UK government bond purchases held for monetary policy purposes, and financed by the issuance of central bank reserves, to zero. This should be conducted through a multi-year plan, such that the remaining stock of £368 billion of bonds held for monetary policy purposes is unwound at an annual average pace of £46 billion by the end of 2034, through annual sales of £20 billion alongside maturing gilts.
If pursued, this programme might reduce the current scale of bond sales by the Bank of England, which could, as a consequence, slightly ease upward pressure on interest rates, but by very little. That is because the guidance given is almost as important when it comes to long-term interest rates, which is what QE and QT are meant to influence, and the clear indication given is that the Bank wishes to dispose of all the bonds that it acquired after the 2008 financial crisis and the financial crisis of 2020, which arose as a consequence of Covid.
This decision makes no sense at all.
First, it gives the clearest possible indication that the Bank of England is intent on keeping interest rates in this country above the level they would naturally be for years to come. Those high interest rates have already penalised households, pushed unemployment higher than necessary, reduced economic activity, suppressed demand, and, as a consequence, helped fuel the rise of far-right politics in this country. If the Bank of England had set out to support the rise of fascism, it could not have delivered a stronger indication of its willingness to do so.
Secondly, what this process will do is remove reserves from the banking system. In other words, the value of the central bank reserve accounts held by our commercial banks with the Bank of England to ensure that the banking system is liquid, can survive shocks, and can provide the interbank stability that is fundamental to the operation of the UK financial services system will be reduced as a consequence, to the point where bank stability will be compromised.
In addition, the pressure upon banks to retain reserves to replace central bank-provided liquidity will be high, and the result will be that they will provide even less credit to UK business than they do already, with a consequent reduction in the level of investment in this country, which we already know is far too low for comfort.
Again, if the Bank of England wanted to send out a signal that, in this case, they are trying to create a banking crisis in this country, their message could not have been clearer.
I can offer no rational explanation for what the Bank of England has done today because, try as I might, I do not think that any is available. I do, therefore, have to look for irrational explanations.
The first is that the Bank of England has no comprehension at all of inflation, or the impact of monetary policy on it.
The second is that the Bank just does not care. They think there is a required response to inflation, which is an increase in interest rates, and so they will do it, come what may. This, then, is not management; it is the abandonment of a responsibility.
The third is that the Bank of England has adopted Schumpeter's view that what the economy needs is an economic shock and that, without the so-called 'creative destruction' that he described, the current economic malaise in this country cannot be resolved, and it is intent on supplying that from beyond the boundaries of democratic control.
Which of these is the most likely option? I see no reason to choose. I think all three might be true, but the last most of all. Nothing can easily explain what they are doing.
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The policy of £20bn/year average active disposals was agreed, but at the end of the minutes (52) it was paused to look at an arrangement where the government buys back the gilts and there are no private auctions, with a decision to be made after April 2027.
Additionally, there is an intent to retain £120bn of long-term gilts, so there’s been a change away from getting rid of all of the QE amount.
Having said that, the (paused) agreement only looked smaller than last year’s QT because the amount of expiring bonds will be lower – the active QT rate planned was almost unchanged (£20bn vs £21bn).
The way things were discussed in the previous sections of the notes did very much look like they were more concerned about meeting an arbitrary deadline rather than giving much consideration to the impact.
Their own notes show they estimate it pushed up long-term gilt rates by 20-30 basis points (0.2-0.3%) since 2022. Since much of that the 200 basis points increase would have just been the global end of near-zero interest rates post-Covid, that effectively accepts responsibility for maybe half of the remaining increase. They chose not to call out the losses expected from those disposals, or the impact of that increase in bond rates on government finances.
The other important point is that having predicted significant food inflation and wage inflation increases caused by energy price rises, and responded to its absence by setting a new date for its appearance, much like a prophet failing to predict the return of the messiah and instantly picking a new date. When will this Rapture-flation actually arrive? Or are their predictions equally untethered by fact?
The Bank’s decision seems crazy (that’s the politest word I could find).
The Guardian’s headline is, “Bank of England holds interest rates at 3.75% but warns war could force future rises”. If there’s one thing the Bank cannot control it is foreign wars (I hope they are not privilege to information that Burnham is about to start a war). So what madness is this? “If there’s a war somewhere that is damaging the UK economy we’ll join in and damage it some more by raising interest rates”. I hope the Bank has a resident psychiatrist.
On another note, as you have noted, interest rate changes take 18 months or longer to have full effect. So, presumably, they will be using their prediction to forecast high inflation one to two years out (in the mistaken belief that interest rates will curb it). The problem is, as is well documented in economics papers, the BoE’s inflation predictions have essentially zero predictive value a year or more hence. So they have no idea what inflation will be when interest rates take effect.
As I was writing this it seemed crazier and crazier. Surely no rational human can believe this nonsense? That leaves only one conclusion ………. (and it’s very frightening).
Crazy is the right word
Might reasons for this preparation for a dodgy decision include the following:
1) The unrepresentative/undemocratic composition of the deciding body
2) The silo (lack of) thinking by those making current appointments
3) The filtering out of any heterodox thinkers
4) The prioritisation of rentier interests ahead of citizen and community interests
5) The excessive influence and power of the financial and main stream media groups in our deformed poliarchy form of governance
Yes
Or maybe corruption instigated by powerful men in the shadows?
Once again the BoE say the quiet part out loud namely that they use unemployment to manage inflation
“While energy prices have shot up, the jobs market remains weak, helping to contain the risks of the “second-round effects” that allow inflation to become embedded.”
https://www.theguardian.com/business/2026/sep/17/andy-burnham-bank-interest-rate-rises-inflation
Original report here (3rd paragraph):
https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2026/september-2026
Might I suggest a letter writing campaign to all MPs demanding an end to this practice and the associated vilifying of the unemployed?
I think they are terrified to let go of what they’ve always believed which is the discredited Freidman view of inflation. Namely, it(inflation) is only a monetary thing- too much money chasing a limited number of goods. This hasn’t been true of any recent inflations and I suspect it only applies to irresponsible govs printing money.
The MPC are acting only with the interests of banking and financial markets in mind I.e. their own interests. The truth would be too unpalatable for them and might harm their own future earnings and prospects. They need to be given their P45s.
Much to agree with
Bailey has got to go.
He must surely know how much power he has got and it has gone to his head.
Either that, or we now have the clearest, most recent proof that the our economy is ran by and for rentiers and monopolists – it has become detached from democracy.
I’m about to watch C4 News. If you hear anyone screaming and swearing at his TV, then please accept my apologies.
You did, I am sure….
Tim Putnam says:
The BoE today reduces overall QT sales target by about 1/4. 2/3 of what remains to be achieved passively, reducing active QT p/a from about £75 bn to £20. Someone is picking up on your arguments over there though they could obviously do more if not face saving or trimming in the face of market expectations. But you strangely don’t seem to appreciate this in the post above. Have I missed something?
-dramatically slows reduction of commercial bank reserves and restores some lending capacity
-restores some UK budgetary headroom? likely lower yields and/ or greater gilt sales capacity
-combined with holding rates appears to implicitly acknowledge that inflationary implications current input cost increases cannot be counteracted by classic monetary manoeuvres.
I think they are doing a great deal I do not agree with
No doubt. And we would love to know more about that. But please respond to the points raised .
I have
“They think there is a required response to inflation, which is an increase in interest rates, and so they will do it, come what may”
The BoE has historically, from at least the ERM disaster, adopted raising interest rates as the primary means of controlling inflation directly created by non-domestic circumstances or government policy decisions outwith the control of the public. The reaction is so predictable it seems autonomic, like sheep transfixed by the headlights of an approaching car. The only reason for this ingrained desire to dive bomb into failure that I can see is that it is the only strategy guaranteed to increase the wealth of the few at the expense of the public, usually with clarion calls to the masses to “work harder” as in today’s French budget speech. And the MPC is the self-appointed guardian of the wealth of the nation, not its economic viability.
And so we can expect economic disability and contraction at precisely the point where we need to invest in autarchy and growth. No Keynesian planning for us, we’re British.
The big question is: what types of people pass job interviews for positions at the Bank of England?
This was raised on R4 Today discreetly pointing out that the bonds in question were bought at a high price during the financial crisis and are now being sold cheap. BoE seems to find virtue in running up trillion pound losses in the bond market in pursuit of questionable policy gains, the effect of which is to transfer mind boggling sums from public funds to banks and other market players. I was telling anyone prepared to listen during the crisis that a far superior policy would be to buy bonds from a ‘public housing and infrastructure bank’ which would finance housing associations, councils and other providers to build homes for controlled rents and finance the reinforcement of the National Grid and construction of renewable energy. So making Britain happier, wealthier and richer, creating productive employment and boosting the economy and long term resilience. Had they done this we would all be far better off today.
It is billions, not trillions, but otherwise much to agree with.
What frustrates me almost as much as the Bank itself is the extraordinary dumbing down of economic journalism.
We are constantly presented with people described as “economic experts” who still explain public finances using household-budget analogies: the country has “maxed out the credit card”, we have “run out of money”, borrowing must be “paid back”, and government should tighten its belt just like a family.
It is economically infantile.
A sovereign currency-issuing state is not a household. Gilts are not simply the national equivalent of a bank loan, and public borrowing is not automatically evidence of profligacy. What matters is what the spending achieves, what real resources are available, what inflationary pressures exist and whether investment increases productive capacity.
The same lazy shorthand surrounds productivity. We are endlessly told Britain has a productivity problem, as though workers simply need to work harder or become more efficient by force of will.
Productivity comes from investment: infrastructure, technology, machinery, skills, transport, energy, research and functioning public services.
Then the same commentators applaud high interest rates, fret endlessly about borrowing, support spending restraint and wonder why investment and productivity remain weak.
There are serious debates to be had about inflation, debt, monetary policy and public spending. Too much economic journalism reduces them to tired analogies and repeated orthodoxies instead of explaining how a modern monetary economy actually works.
For people presented to the public as experts, we should expect rather better.
Thank you, and agreed.
Ah yes another daft policy decision by the Bank. I think the rationale is that they are following orthodox thinking and reacting accordingly. I did notice someone on Today who actually questioned the idea that raising interest rates would have any effect on rising energy prices!!
I think one problem those of us who think policies are to say the least stupid and unjustified is that we feel well who I am to question these people who are in charge of the bank or whatever institution, surely they know what they are doing, thats their job, thats what they are qualified to do. And I guess when you mention that you think the policies are unwise, unnecessary and often downright dangerous to friends, relatives they probably think you unqualified to question those at the top!
This carries a human cost and there are several people facing mortgage renewals in the next year or so having everything from concern to a complete panic attack on various internet forums