2026-09-18 Friday

The Committee judges it appropriate to maintain Bank Rate at this meeting and stands ready to act as necessary to ensure CPI inflation remains on track to meet the target in the medium term.

The energy shock is the dominant force: Brent crude reached $106/barrel and spot prices of Brent crude and UK wholesale gas had risen by 36% and 78% respectively since the period leading up to the July Report. CPI inflation is projected to reach slightly above 4% in 2027 Q1. Services inflation was 3.4% in August, unchanged from July, and annual growth in private sector regular Average Weekly Earnings was 2.9% in the three months to July, a little above expectations at the time of the July Report. The unemployment rate was estimated at 4.9% in the three months to July, and GDP had increased by 0.4% in 2026 Q2, with monthly GDP rising by 0.4% in July. The Committee's projections assume the July adverse scenario oil and gas price paths are a reasonable proxy for a state of the world in which the conflict continues with no clear resolution, and most members placed more weight on energy prices staying higher for longer in the absence of a lasting de-escalation. Some members, including Dhingra and Taylor, placed particular weight on the role of slack in moderating inflation, evidence of restrained pass-through, and the restrictive level of Bank Rate, allowing more time to observe evidence. The risk of second-round effects is greater the longer higher energy prices persist or are more volatile, and the geopolitical environment remains highly uncertain.

Separately, the MPC unanimously decided to reduce the stock of UK government bond purchases held for monetary policy purposes to zero via a multi-year plan, unwinding the remaining gilt holdings at an annual average pace of £46bn by end-2034, through annual sales of £20bn alongside maturing gilts. The unwind of the APF from its peak of £895bn in February 2022 to £488bn in September 2026 has already contributed an estimated small fraction, on the order of a tenth, of the rise in UK term premia since February 2022, and the new sales will add to gilt supply. The plan assumes a fixed intended pace of unwind, with a high bar for reconsideration, only if Bank Rate alone is insufficient to meet the inflation target or if markets are very distressed. The Bank will set aside a designated portion of the longest-dated gilts to back banknote issuance. Waiting to choose a number for active sales until the DMO's involvement was clear would allow faster balance sheet shrinkage, but withholding a number risked destabilising markets.

The Governor and the Chancellor exchanged letters on 17 September 2026 updating how quantitative tightening will be implemented and agreeing a new strategy for backing banknotes, with the Bank rate held at 3.75% at the September meeting. The change is one of behaviour rather than of numbers: the framework governing how the Asset Purchase Facility is run has been rewritten, and the letters were published alongside the Governor's pooled broadcast interview. The terms agreed set the pace at which the Bank's gilt holdings run off, and therefore the supply the Debt Management Office must place with private buyers — the channel through which the decision reaches the long end of the curve.

CPI inflation in August 2026 sat more than a percentage point above the target, obliging the Governor and the Chancellor to exchange open letters on 17 September 2026, published with the September Monetary Policy Summary in which Bank Rate was held at 3.75%. The trigger is the remit itself: the deviation is measured against the target the MPC is bound to, not against any forecast. The letters put the overshoot on the record and tie the Committee's tolerance for above-target inflation to a public exchange with the Treasury, which is the document gilt investors read for how long the undershoot of the target will be allowed to persist.

Governor Andrew Bailey said rates were held on 17 September 2026 while the Federal Reserve and the European Central Bank raised rates the previous week, and that a cut would require an end to the Middle East conflict and energy prices back at pre-conflict levels. He put UK mortgage rates up by nearly 1% since the end of February, when the conflict began, calling it a substantial tightening of monetary conditions, and said the MPC did not discuss raising rates four times despite market bets on up to four hikes next year. The divergence is the point: with Bank Rate at 3.75% while the Fed and ECB tighten, the pass-through already delivered through mortgage pricing does part of the work, and the gilt curve carries the rest.

The Bank Board left the two-week repo rate at 3.75%, the discount rate at 2.75% and the Lombard rate at 4.75%, with Governor Aleš Michl due to hold an afternoon press conference in Prague. The corridor is unchanged in all three of its rates, so the decision carries no signal about the next move beyond the press conference itself. For Czech government paper the relevant anchor is the repo rate at which the central bank absorbs liquidity, and holding it leaves the spread to euro area yields to be set by the ECB's tightening rather than by anything decided in Prague.

The MPC set out a multi-year path to run its monetary policy gilt holdings to zero, with annual sales of £20bn alongside maturing gilts, and engaged HM Treasury and the Debt Management Office on a model in which the MPC's decision is implemented through APF sales to the Government. Under it, HMT would instruct the DMO to buy the APF gilts at market prices in a pre-defined, pre-announced manner at an annualised pace of £20bn, with sales concluding around the unwind of gilts held to maturity in 2034. The Bank will review progress before April 2027 and APF auctions pause in the meantime — a change of behaviour that removes a standing seller from the market and hands the flow to the DMO, against a total portfolio of £488.2bn.

The ECB Wage Tracker's main indicator — negotiated wage growth with smoothed one-off payments — points to 2.7% in the first half of 2027, a slight acceleration from the 2.2% profile for 2026. The quarterly path is 2.7% in the first quarter of 2027 and 2.8% in the second, against 1.8% in the first quarter of 2026 and 1.9% in the second. The 2026 weakness is mechanical rather than behavioural: one-off payments originally made in the second half of 2024 drop out of the annual comparison, damping the smoothed series, and those effects fall out completely in the second half of 2026. That is why the tracker's unsmoothed variant fell to 2.6% in 2026 from 3% in 2025, while the variant excluding one-off payments sits at 2.6% for 2026 — the underlying negotiated trend is steadier than the headline swing suggests.

The method matters for how much weight the forward-looking numbers can carry. The tracker aggregates granular collective wage agreements from nine euro area countries in two steps: country indicators built with country-specific coverage, then combined into a euro area aggregate using time-varying weights from the distribution of compensation of employees in the national accounts. Four indicators are published, and the forward-looking component reflects only information currently available on ongoing collective agreements — it is explicitly not a forecast. Coverage is the binding constraint: the 2026 average rests on 46.9% of employees in participating countries, the first quarter of 2027 on 32.5%, and the second quarter of 2027 on 25.1%. In the second quarter of 2027, Germany's coverage is 28.8%, Greece's 13.1%, France's 10.3% and Spain's 8.7% — the signal leans heavily on the German sample.

The Bundesbank also cites a projection for euro area compensation per employee of 3.3% in 2026, a broader measure that includes bonuses and employer contributions and therefore sits above the negotiated-wage tracker. The counterpoints are structural: the tracker is subject to revisions, it does not exactly replicate the indicator for growth in negotiated wages, and forward-looking signals depend on which agreements are in the database at a given point in time — a particular problem around the turn of the year when many agreements are signed. The horizon itself is still short: it extends to the third quarter of 2027 with the November 2026 release and to full-year 2027 with the December 2026 release, and coverage should rise as new agreements are concluded.

For the Governing Council, the mechanism is a coverage-weighted signal rather than a forecast: a main indicator that steps up from the 2026 average to the first half of 2027, with the second quarter of 2027 at 2.8%, keeps negotiated wage pressure in the inflation assessment even as the sample behind that reading thins to 25.1% coverage. The revision risk is concentrated exactly where the signal is strongest — the sparse 2027 quarters, where German agreements dominate and where the December release will add the missing full-year contracts.

The SNB's latest update to its GC Basket repo-eligible securities list shows a clear pattern: a wave of exclusions of USD-denominated supranational bonds on 2026-09-16, while new collateral was added across CHF, EUR, USD, GBP, NOK, SEK and DKK. The most prominent exclusion is a World Bank USD bond with an outstanding amount of $1.5bn, which was removed from the eligible set. This reduces the pool of high-quality liquid assets (HQLA) that SNB counterparties can pledge, particularly for USD-denominated supranational debt.

On the addition side, the SNB accepted a new Asian Development Bank EUR bond with an outstanding amount of €1.25bn, a Kommunalbanken A/S USD bond of $1bn, and a Kingdom of Norway NOK bond of NOK 10bn. These additions expand the eligible collateral set, but the simultaneous removal of USD supranationals suggests a deliberate shift in the SNB's collateral framework. The document also lists redemptions, including a German Federal Republic EUR bond of €19bn and a Kingdom of Sweden SEK bond of SEK 42.5bn, which naturally shrink the pool as bonds mature.

The SNB's criteria for HQLA classification are defined in the revised Liquidity Ordinance, and the SNB explicitly accepts no responsibility for the classification. This means the list is a mechanical application of regulatory standards, not a discretionary policy signal. The exclusion of USD supranationals may reflect changes in their HQLA status under the revised ordinance, or a reassessment of their liquidity in SNB repo operations.

For market participants, the practical effect is a narrower set of eligible collateral for SNB repos. Counterparties holding excluded USD supranational bonds will need to substitute them with other eligible assets, potentially increasing demand for the newly added securities and tightening repo conditions for the excluded names. The addition of new L1 and L2a collateral across multiple currencies partially offsets the reduction, but the net effect on the Swiss repo market depends on the relative sizes of the excluded and added bonds.