19 September 2025

Jonathan Sparks

Chief Investment Officer, UK, HSBC Private Bank and Premier Wealth

The Bank of England (BoE) kept its policy rate unchanged at 4% in September, voting 7-2 against a cut. While two members supported easing, the broader Committee preferred to wait, signalling they remain focused on sticky inflation pressures keeping a lid on inflation expectations.  

Despite slowing growth momentum, the BoE remains cautious because of inflation expectations. Headline inflation is falling, but the stickiness of core measures, especially in services and housing means the risk of a wage-price spiral hasn’t disappeared. The jobs market is clearly softening, with vacancies declining, but the bank wants more evidence before cutting rates.

In short, the BoE’s position is not a million miles from that face by the Fed, where Chair Powell noted that that there was no policy path that didn’t carry risk: a focus on inflation, risks lower growth; while a focus on growth, risks higher inflation. 

Source: Bloomberg, HSBC Private Bank as of 18th September 2025.

In a nod to the fiscal pressure facing the government, the BoE did use another tool in their toolkit. Instead of selling £100bn of gilts over the next 12 months, as part of their Quantitative Tightening (QT) program, the bank now plans to sell £70bn, reducing the amount of long-dated bonds it will release into the market. The move comes after 30-year gilt yields spiked to their highest level in nearly three decades, thanks largely to a global rise in yields, while also likely reflecting investor concerns over debt sustainability.

For investors, this shift is significant, but had been mostly priced in. Long dated gilts are often the most volatile part of the market, heavily influenced by supply and demand imbalances. By scaling back gilt sales at these longer maturities, the BoE is acknowledging the strain higher yields were placing on borrowing costs, fiscal dynamics, and overall market stability.

Unfortunately for the government, this won’t make much of a difference to borrowing costs because there are less gilts maturing in the BoE’s bond portfolio – if gilts mature, the BoE’s bond book shrinks without them having to sell them. This is why Catherine Mann wanted to reduce QT to £62billion because this would keep the pace of gilt sales the same. Of course, when a gilt matures, the government will likely need to borrow more to refinance the debt, but the Treasury has some flexibility here and can focus more on shorter-dated, cheaper borrowing.  

All in all, the BoE meeting did help the government but not explicitly as there primary concern would be that high longer-dated gilt yields would weight too much on financial conditions. There is also limits, to what they can do given that the UK is an open economy and therefore highly influence by global interest rates.

Source: Bloomberg, HSBC Private Bank as of 18th September 2025.

To really move the dial on debt sustainability in the most painless way, the UK needs a productivity boom. As the chart below shows, labour productivity has yet to reflect the optimism in AI. Yet the announcement of £150bn in largely AI focused investment during Trump’s visit reveals where UK policymakers seeing the best hope for productivity growth. The big investment in data centers mirrors the huge infrastructure push in the US. 

Source: Bloomberg, HSBC Private Bank as of 18th September 2025.

We expect this investment will bear fruity, but not in time for the late November budget. Therefore, UK gilts could be volatile in the comes months, and so too could GBP. That why we recommend kicking the tires on any currency exposures.

Ultimately, we stay overweight UK gilts because positive real yields make gilts one of the most attractive sovereign bond markets globally. Also, we expect the BoE will eventually cut rates to 3.0% - this is two more cuts than the market expects.

For UK equities we remain neutral. With growth subdued and earnings uneven, defensives should provide relative resilience, while cyclicals may struggle against weaker demand.

Source: Bloomberg, HSBC Private Bank as of 18th September 2025.