Bank of England Chief Economist Huw Pill has reinforced the central bank's commitment to fighting inflation amid rising global bond yields and market tensions. Speaking on the sidelines of the World Economic Forum in Davos, Pill emphasized that "inflationary pressures remained a concern and monetary policy needed to stay focused on bringing them under control." He stressed the importance of "ensuring the financial system continued to function effectively so that monetary policy could be transmitted to the broader economy." The comments come as the Bank of England's Monetary Policy Committee (MPC) remains divided over the interest-rate outlook, with Pill and two other MPC members voting to raise rates in September while a majority preferred to keep them unchanged. As per The Economic Times, Governor Andrew Bailey and other policymakers have indicated that the time for an interest rate hike could be approaching, keeping the outlook for UK monetary policy uncertain.
British 30-year gilt yields jumped 13 basis points to 6.036%, reaching their highest level since January 1998 as a global bond market selloff pushed equivalent US borrowing costs to their highest since 2002. The surge comes as oil prices rose further above $100 a barrel amid the US-Israeli war against Iran, adding to inflationary pressures that are raising apprehensions among bond investors globally. As per The Economic Times, 20-year gilt yields were a whisker away from a similar record, with 30-year yields on course for their biggest daily rise since August 14. The 10-year gilt yield climbed 10 basis points to 5.48%, just short of its highest since 2007, while 10-year Treasury yields rose 6 basis points compared to the sharper 10 basis point increase in British gilts. Rising global bond yields have added to the challenges facing central banks as they seek to contain inflation without placing excessive pressure on economic growth, with higher borrowing costs potentially affecting household spending, business investment and credit demand.
The Alternative Investment Management Association (AIMA) has issued a direct warning to the Bank of England about proposed reforms to the gilt repo market, according to reports from Reuters. The hedge fund industry group raised concerns in a letter this month about plans to expand central clearing in the short-term loan market secured against UK government bonds. AIMA warned that the proposed changes could create new vulnerabilities, leaving investors more exposed to funding-market disruptions during periods of market stress. The letter, signed by AIMA's global head of markets Adam Jacobs-Dean, represents a notable escalation from the group's response last year to the BoE's initial proposals, when it flagged what it called "significant structural issues." In a sign of mounting concern, AIMA told the Bank of England this month that its members had raised fresh questions about any further expansion of central clearing.
The rise in gilt yields comes amid broader pressure on global bond markets and ahead of Britain's October 28 budget. Finance Minister John Healey met with economists working for primary dealers, known as gilt-edged market makers or GEMMs, to assess market sentiment ahead of his first budget. As per The Economic Times, the finance ministry said Healey emphasised the importance of fiscal credibility in a challenging global economic environment, reaffirming the government's commitment to fiscal rules and economic stability, growth and jobs. Economists at Bank of America forecast that Healey's budget would lead to £15 billion ($19.9 billion) increases in public borrowing in both the current financial year and 2027/28, which could leave the government with less room to meet its longer-term fiscal targets. Bailey's warning about the need for "credible and directed at stability" fiscal policies adds urgency to these concerns.
The Bank of England is consulting on measures intended to make the gilt repo market more resilient, including expanding central clearing arrangements, according to Reuters. Under such arrangements, a central counterparty stands between buyers and sellers and guarantees trades, helping to reduce counterparty risk. The proposals also include minimum haircuts on non-centrally cleared repo transactions, which are intended to better protect lenders and reduce the risk of forced asset sales during periods of market stress. Deputy Governor Sarah Breeden noted in July that authorities could not simply leave the existing framework unchanged, warning that banks could withdraw repo financing more aggressively during a severe market shock. The planned changes followed the 2020 "Dash for Cash" and the 2022 liability-driven investment crisis, which exposed weaknesses in the market and amplified stress, ultimately requiring central bank intervention. AIMA warned that the reforms could encourage hedge funds to rely more heavily on shorter-term daily repo financing rather than typical two-week arrangements, potentially leaving investors more vulnerable to funding disruptions.
AIMA has urged the Bank of England to wait and assess how the US clearing mandate works before implementing similar measures in Britain, according to Reuters. The United States is preparing to introduce mandatory central clearing for Treasury repo transactions from next year, representing the most significant shift in Treasury market infrastructure in decades. Deputy Governor Sarah Breeden pointed to this international context, noting that similar initiatives were being pursued internationally, notably in the US Treasury market, where central clearing will be mandated for all Treasury repo borrowing from next year. The Bank of England has said any reforms would likely take years rather than months to implement, with the central bank yet to decide which proposals it will ultimately take forward. The UK Debt Management Office is scheduled to auction January 2028 and July 2031 gilts later on Wednesday, providing a further test of investor demand for British government debt.
