BoE 5-4 vote in favour of 25bp cut – Sterling could be hit by Taylor rule endorsement
|On balance, we think that Bailey will have seen enough to side with the doves on Thursday - the November meeting minutes suggested that he was very close to doing just that last time out. The real question is whether any of the hawks follow suit.
Our suspicion is probably not, with members Greene, Lombardelli and Mann all sounding quite hawkish during recent remarks, either expressing concern over inflation, highlighting the need for a further deterioration in the jobs market or playing down the disinflationary impact of the budget. Chief economist Pill could make it a 6-3 vote, but he has also voiced a preference for a slow removal of policy restriction during his latest remarks, so he may again opt for no change.
No less important to the voting split will be the bank’s accompanying guidance. Markets will be looking for clues that pertain to two factors, namely: the pace of any further easing and the bank’s estimate for the terminal base rate.
Given the disparity of views within the MPC, we think that the guidance will stress any further cuts will be “gradual” - the word “careful” was removed from the communications in November. We think that the BoE will be vague on the terminal rate to give itself optionality, although we would not be surprised to see Bailey again endorse the Taylor Rule, which would imply one or two more cuts in 2026.
With swaps assigning north of a 90% chance of a 25bp rate cut this week, expect sterling to take its cue from both the vote and the guidance.
Our call is for a 5-4 vote: six or more votes would be bearish for the pound, while a shock decision in favour of no change would lead to a knee-jerk rally.
As mentioned, we think that the guidance will be non-committal, although GBP could fall should the bank firmly align itself with the Taylor Rule, which points to a low in the base rate of 3.3% (i.e. two more cuts in 2026). Downward revisions to the growth and/or inflation projections would exacerbate such a move in sterling.
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