The last 24 hours have seen pressure reapplied to the UK government bond market as in an accident of timing the it has been hit twice in two days. We can start with a move from the Bank of England yesterday.
At this meeting, the MPC had voted to reduce the stock of UK government bond purchases held for monetary policy purposes by £70 billion over the 12-month period from October 2025 to September 2026. The details of the first quarter of the associated gilt sales programme, covering 2025 Q4, were set out in a Market Notice accompanying these minutes.
This was a move I expected as I pointed out yesterday but it left the impression that they were making the minimum cut to the previous £100 billion they thought they could get away with. In fact it disappointed the UK bond market and the futures contract fell by a quarter of a point. This was in spite of this addition.
For the year starting 2025 Q4, the Bank would aim to sell fewer long maturity sector gilts than gilts at other maturities, such that approximately 40% of the MPC’s target would be met by selling short maturity sector bonds, 40% by medium maturity sector bonds, and 20% by long maturity sector bonds, measured in initial proceeds terms.
This was no doubt a plan concocted in the Ivory Tower of the Bank of England as a sop to Chancellor Rachel Reeves and the pressure she is under via elevated UK bond yields. But for fans of Blackadder it has turned out to be more like one of Baldrick’s cunning plans as the bond market weakened again. To my mind they needed to stop the bond sales entirely if they wished to make a positive impact. But that would come with an admittal that they have been a mistake.
The situation regarding the bond market has not been helped by the way that inflation has persisted in the UK and that we have a central bank Governor still keen to cut interest-rates.
Against the backdrop of a gradual easing in underlying price pressures in the UK economy, the recent increase in CPI inflation has owed largely to food prices and
administered prices, including water bills and Vehicle Excise Duty.
As you can see according to the Governor in his explanatory letter to the Chancellor inflation is falling apart from where it has gone up! But there was already a secondary factor of him telling her it was her fault which he then rammed home.
A reduction in total labour cost growth also appears to have been delayed by the increase in employer National Insurance Contributions (NICs) and pay growth in sectors with a large share of employees at or close to the National Living Wage (NLW).
As Lily Allen put it.
It’s Not Me, It’s You.
Problems with the Public Finances
Those who follow my work will know that the previous government made little effort to cut back after all the Covid spending and borrowing. This was added to by the present Chancellor who decided to borrow an extra £30 billion in her October Budget leading to figures like the one released this morning.
Borrowing – the difference between total public sector spending and income – was £18.0 billion in August 2025; this was £3.5 billion more than in August 2024 and the highest August borrowing for five years.
It is the latter part which particularly echoes in a strategic sense as we were supposed to recover in economic terms. But the combination of a lack of economic growth and policy choices to spend more we find ourselves borrowing ever more. That theme is reinforced if we look for more perspective at the fiscal year so far.
Borrowing in the financial year to August 2025 was £83.8 billion; this was £16.2 billion more than in the same five-month period of 2024 and the second-highest April to August borrowing since monthly records began in 1993, after that of 2020.
Frankly you can see why our bond yields are high both relatively and absolutely when you look at that. They can see an increasing stream of borrowing accompanied by the Bank of England selling as well so why not make us pay for it?
August Figures
Let me start with a consequence of the failures of both the Bank of England and the government.
central government debt interest payable increased by £1.9 billion to £8.4 billion, with movements in the Retail Price Index (RPI) adding volatility to the monthly debt interest costs.
Our relatively high inflation rate has a real cost to the public finances here.
Capital uplift was £2.6 billion in August 2025, which largely reflects the 0.4% increase in the RPI between May and June 2025.
The Bank of England recently responded to the higher inflation rate with a cut in interest-rates to 4%. The Chancellor had an October Budget which raised inflation in the way described in the Governor’s letter I quoted from earlier. I recall the Bank of England estimating her Budget would raise inflation by at least 0.5%. The combination was described by Britney.
With a taste of your lips, I’m on a rideYou’re toxic, I’m slippin’ underWith a taste of a poison paradiseI’m addicted to you.
If that wasn’t toxic enough the increase in spending was.
Central government’s current expenditure was provisionally estimated as £89.1 billion in August 2025, £7.8 billion more than in August 2024. Of this £7.8 billion increase in spending:
It was in fact a combination of policy choice and yet more inflation often added to by the policy choices.
central government departmental spending on goods and services increased by £3.7 billion to £38.0 billion, as pay rises and inflation increased running costs…….net social benefits paid by central government increased by £1.1 billion to £27.3 billion, largely caused by inflation-linked increases in many benefits and earnings-linked increases to State Pension payments.
The receipts and revenues figures were actually pretty good so it was not their fault.
Central government’s current receipts were £84.3 billion in August 2025, £4.3 billion more than in August 2024. Of this £4.3 billion increase in income:
The trouble is that there is a problem there as much of the increase was due to tax rises which are likely to slow the economy.
compulsory social contributions increased by £2.6 billion to £16.4 billion; on 6 April 2025 changes to the rate of National Insurance contributions paid by employers came into effect.
The cost of QE
Is apparently zero because after counting the profits apparently losses do not count.
Over this period, central government made payments totalling £7.4 billion to the Bank of England (BoE) Asset Purchase Facility (APF) Fund, £16.1 billion less than in the same five-month period of 2024. These payments are recorded as both central government net investment expenditure and BoE receipts and so have no impact on overall public sector borrowing (PSNB ex).
The first rule of OBR Club is that the OBR is always wrong
Another good month for this via James Smith of the Resolution Foundation.
Borrowing was £18bn in Aug, £3.5bn higher than last year, highest in 5 years, and £5.5bn above the OBR forecast. Borrowing is now £11.4bn above the OBR forecast in the year to date.
Is that the same Resolution Foundation whose former head Torsten Bell was part of the new government plan to increase the role of the OBR? Well it gets worse as I note this from a former minister before she resigned due when he conviction for fraud came to light. Here is Louise Haigh.
The OBR’s forecasts are rarely accurate – even the BoE Governor admits it. We can’t make long-term policy on short-term guesses.
She was part of a Labour team that did exactly the opposite whereas now she seems to be copying Liz Truss.
Britain needs a new economic model, not one where unelected bodies force cuts on governments elected to invest in our communities.
Comment
If one steps back and takes stock we look to be in rather a trap. We struggle to raise taxes and if we do they apply a brake to the economy. We seem incapable of controlling spending as the summer U-Turns on benefit spending and the winter fuel allowance showed. So the numbers slip away which leads to both higher inflation and bond yields which only exacerbate the issue.
Whilst we do not have much economic growth we have had some and one sector seems to have started the third quarter well.
Retail sales volumes are estimated to have risen by 0.5% in August 2025, following an increase of 0.5% in July 2025 (revised down from a 0.6% rise in our last bulletin)
The Markit PMI was also positive for August which we need because if growth were to stop then things would quickly get even more toxic.
