Bank of England review: Gradual easing supports a stronger GBP

• At today’s monetary policy meeting the BoE cut the Bank Rate by 25bp to 4.75%, as was widely expected.
• In line with our view, the BoE delivered a hawkish twist to its guidance emphasising their gradual approach to reducing the restrictiveness of monetary policy. We think this supports our base case of the next cut coming in February.
• The market reaction was modest with Gilt yields tracking slightly higher and EUR/GBP moving lower.

As expected, the Bank of England (BoE) decided to cut the Bank Rate by 25bp to 4.75%. The vote split was 8-1 in line with our expectation, with the majority of members voting for a cut and hawk Mann voting for an unchanged decision.

The BoE retained much of its previous guidance noting that “a gradual approach to removing policy restraint remains appropriate”. From the minutes it was evident that this “gradual approach” increasingly is becoming the consensus view within the MPC. In line with our expectation the BoE revised its inflation and growth forecast higher following the fiscal announcement last week, which delivered a notably more expansive fiscal stance than assumed in the latest round of BoE forecasts from August. The BoE now sees CPI at 2.7% y/y (prev. 2.2%) and GDP at 1.7% y/y (prev. 0.9%) in Q4 2025. While we still think only a gradual cutting cycle is warranted, amid the inflationary boost from the fiscal policy announced, we highlight that the new forecasts were done with a market implied Bank Rate path from prior to the Budget announcement. This is important as this path was notably lower than current pricing, which in turn means that the upward revisions above should be taken with a pinch of salt.

Overall, we think the communication today supports our call of a more gradual approach to the cutting cycle. We expect the next 25bp cut in February with the Bank Rate ending the year at 4.75% in 2024 and 3.25% in 2025.

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