Setting the stage for an August cut
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The BoE kept the Bank Rate unchanged at 4.25% as widely expected.
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The vote split was slightly to the dovish side but the statement revealed that BoE still favours a “gradual” and “careful” approach to easing monetary policy whilst highlighting elevated uncertainty.
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The market reaction was muted as expected.
As expected, the Bank of England (BoE) decided to keep the Bank Rate unchanged at 4.25%. The vote split was 6-3 with 6 members favouring an unchanged decision with Dhingra, Ramsden and Taylor favouring a 25bp cut. This was slightly to the dovish side of expectations.
The BoE retained its previous guidance noting that “a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate”. The BoE 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”. As we had expected, the MPC noted that “there had generally been some greater signs of disinflationary pressures from the labour market”. Coupled with lower-than-expected growth we think this will prompt the BoE to continue easing monetary policy the coming quarters.
Overall, we think the communication today supports our call of a continuous gradual approach to the cutting cycle with the BoE repeating its previous guidance. We expect the BoE to stick to quarterly cuts, leaving the Bank Rate at 3.75% by YE 2025, which is aligned with market pricing. Markets are pricing 50bp for the remainder of the year. However, we highlight that the risk is skewed towards a swifter cutting cycle in 2025 and 2026 given the downside risks to growth and the labour market.
Market reaction. It was a muted reaction in EUR/GBP and UK rate space in line with our expectation. More broadly, we stay negative on GBP. An investment environment characterised by elevated uncertainty and a positive correlation to a USD negative environment, in our view, favours a weaker GBP. Tentative signs of a weaker growth outlook for the UK economy also acts as a headwind for GBP. We therefore expect EUR/GBP to move higher towards 0.87 on a 6-12-month horizon.
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