The Bank sets Bank Rate. Gilts are priced from there.

The government sets the inflation target. It is 2%, measured by the consumer prices index. How that index is put together, and how it differs from the Retail Prices Index, is on CPI/RPI. The Monetary Policy Committee decides how to meet that target. Its two instruments in the gilt market are Bank Rate, and the size of the Bank's holding of government bonds.

The Bank also issues banknotes, holds the accounts of the banks and of the government, and runs the high-value sterling payment system. Through the Prudential Regulation Authority it supervises banks and insurers. The Financial Policy Committee watches risks to the system as a whole, and the Bank can lend to a bank that is short of cash. Those jobs reach the gilt market when a dealer or a pension scheme is under strain. The purchases of long and index-linked gilts in the autumn of 2022 were that kind of operation, held in a separate portfolio and then sold. That episode is on the mini-budget page.

Bank Rate is the interest the Bank pays on the reserves commercial banks hold with it. A bank that can earn that rate overnight will not lend the same cash for much less, so the rate at which banks lend to each other overnight sits close to Bank Rate. The rates banks pay on deposits, and the rates they charge on floating loans, are priced from there, plus a margin, and they follow with a lag.

A higher Bank Rate raises the monthly cost of a tracker mortgage and of a business loan that floats. Savers earn more on the accounts that pass the rate through. As old fixed deals end, households and firms refinance at whatever the curve charges for the new fix, and spending cools. A lower Bank Rate runs the same channels the other way: cheaper floating debt, a lower reward for saving, and more room for spending.

Two further channels work through prices rather than through a monthly bill. A rise the market had not already priced tends to support sterling, and a stronger pound makes imports cheaper. The same rise lowers the price of assets that are a claim on income still to come, gilts included, because those future payments are discounted more heavily. The inflation target is met, when the policy works, through this cooler demand and this cheaper import bill. The lag is long, and it varies from one episode to the next.

The two-year yield is the market's reading of Bank Rate over the next two years, plus a small premium for locking the rate in. The ten-year is that reading over ten years, plus a larger term premium. How today's ten-year divides between the expected path and the term premium is on Inside the Yield.

A change in Bank Rate that investors have already priced is already in the curve. The yields moved on the day the expectation changed. A surprise rise lifts the two-year at once. The ten-year moves by the change in the expected average of short rates over the whole decade, and by any change in the term premium. A rise that is expected to be reversed later shows up mostly at the short end. The curve inverts when that near yield sits above the far yield, which is the market saying that cuts are expected further out. The level, the slope and the bend over time are on Curve dynamics.

A five-year fixed mortgage is priced from the five-year point, and a two-year fix from the two-year point. Both can move on a day the Committee leaves Bank Rate unchanged, because both are a path of future settings, not today's single number.

When there was little room left to cut Bank Rate, the Monetary Policy Committee bought gilts so that longer yields would fall. The Asset Purchase Facility did the buying, indemnified by the Treasury, and the Bank paid for the gilts by creating reserves. It pays Bank Rate on those reserves. Since 2022 the Committee has been reducing the holding. Gilts mature, and some are sold back to the market. That is quantitative tightening: private investors hold more of the stock, and the reserves that were created to buy the gilts are cancelled.

While Bank Rate sits above the yield on the gilts the Facility bought, the indemnity is a cost to the Treasury. The coupons coming in are smaller than the Bank Rate paid out on the reserves. The dates, the cash amounts, and the gap between what was paid and face value are on QE and QT.