The Bank of England announced a pause in its sale of government bonds, known as gilts, prompting a sharp decline in UK government borrowing costs. This unexpected move involves halting all gilt sales until April 2027 and initiating talks to transfer more than £100 billion in gilts to the Treasury over the next decade, a strategy aimed at reducing costs for taxpayers.

Following the announcement, yields on government bonds fell notably, with the yield on 30-year gilts experiencing its most significant single-day drop since May, declining 0.12 percentage points to 5.73 percent. Earlier this month, long-dated borrowing costs had reached levels not seen since 1998. Similarly, yields on two-year gilts fell by 0.11 percentage points to 4.62 percent, while 10-year gilt yields decreased 0.1 percentage points to 5.2 percent, retreating from highs last observed in 2007. Since bond yields move inversely to prices, these falls indicate improved market conditions and lower government borrowing costs.

The Bank has begun discussions with the Debt Management Office (DMO) and Chancellor John Healey about a proposal for the DMO to purchase approximately £20 billion of gilts annually from the Bank’s holdings until 2034. This will include retaining short-dated assets on the Bank's balance sheet until maturity and discontinuing the sale of longer-dated gilts, currently valued at around £120 billion, to external investors. Healey responded positively to the plan, stating in correspondence with Bank governor Andrew Bailey that it is intended to deliver “the best outcome for the taxpayer.” A formal decision on the proposal is expected before April 2027.

Since 2022, the Bank of England has been actively engaged in quantitative tightening by selling hundreds of billions of pounds worth of gilts previously acquired during the financial crisis and the COVID-19 pandemic. This process expanded gilt supply in the market, contributing to rising yields and higher government borrowing costs. Independent analyses estimate that these sales have increased borrowing costs by between 0.7 and 0.8 percentage points, amounting to an additional £25-40 billion in annual interest expenditures, while the Bank itself estimates the increase at 0.25 percentage points.

Annual gilt sales had been running at about £70 billion prior to the pause. The Bank’s decision to halt sales is seen by some economists as a necessary step. William Ellis, senior economist at the Institute for Public Policy Research, described the move as “welcome and overdue.” However, the pause is unlikely to provide immediate fiscal relief for Chancellor Healey’s upcoming autumn budget and may marginally reduce short-term fiscal headroom.

The Bank’s broader objective remains to reduce its balance sheet, which has decreased from £895 billion to £488 billion over the past five years. Shrinking the balance sheet through gilt sales has been a way to prepare monetary policy tools for future economic shocks, including potential bond purchases during emergencies. With the current pause, the Bank signals a shift in this approach as it navigates the challenges of balancing monetary tightening with government financing costs.