Bank of England Review – Gradual Quarterly Cuts Remain Our Base Case

• At today’s monetary policy meeting the BoE cut the Bank Rate by 25bp to 4.50%, as was widely expected.
• In line with our view, the BoE delivered a dovish twist to its guidance with a dovish vote split, which triggered the immediate market reaction. Yet the statement and press conference revealed that BoE still favours a “gradual” and “careful” approach to easing monetary policy.
• Gilt yields tracked lower and EUR/GBP moved higher on the dovish vote split and communication.

As expected, the Bank of England (BoE) decided to cut the Bank Rate by 25bp to 4.50%. The vote split was 7-2 with the majority of members voting for a 25bp cut and Dhingra and Mann voting for a larger 50bp cut. This marks an important shift as Mann has been the most hawkish member of the MPC, voting for an unchanged decision the past many meetings. Mann stated that “a more activist approach at this meeting would give a clearer signal of financial conditions appropriate for the UK“.

The BoE retained much of its previous guidance noting that “a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate” adding the word “careful” to reflect the higher degree of uncertainty. It likewise kept the wording that “monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further“. In its updated projections, conditioned on a more hawkish implied Bank Rate path, the BoE revised growth significantly downwards while noting a high degree of uncertainty related to the trajectories of demand and supply in the economy. This will likely be key in determining the future path of interest rates for the MPC. Inflation was adjusted upwards in the near-term on the back of higher global energy costs and regulated price changes in the spring. Overall, we think the communication today supports our call of a continuous gradual approach to the cutting cycle. We expect the next 25bp cut in May with the Bank Rate ending the year at 3.75%. However, we highlight that the risk is skewed towards a swifter cutting cycle in 2025, given the clearly dovish bias within the MPC as evident from today’s vote split and communication.

Rates. Gilt yields moved lower across the board on the dovish vote split. Markets price 7bp worth of cuts for March and 67bp by YE 2025. We highlight the potential for BoE to deliver more easing in 2025 than currently priced, expecting the next cut in May and a total of 100bp worth of easing in 2025.

FX. EUR/GBP moved higher on the announcement with the dovish vote split taking centre stage. The still cautious guidance delivered today highlights the more gradual approach of the BoE compared to European peers. More broadly, we expect EUR/GBP to move lower in the coming quarters driven by a relatively hawkish BoE, and a growth pickup in the UK relative to the euro area in 2025 and a USD-positive investment environment. The key risks are reignited debt concerns and a more forceful policy easing stance from the BoE.