BoE faces another cliffhanger: Markets split on rate cut as Sterling stands vulnerable

Markets

The Bank of England has a reputation of daring to surprise. It’s nickname – unreliable boyfriend – is testament to that. Today we might see one of those upsets with UK money markets discounting a 25% probability to a 25 bps rate cut, but the decision probably being a much closer call than that. Much will depend on BoE governor Bailey’s own views and/or his skills to build consensus around the decision. Over the past months, split vote after split vote highlighted the extreme division in the 9-headed MPC. Hawks including BoE chief economist Pill or Greene assess the still lingering inflation threat as key and don’t want to err on the side of loosening the central bank’s grip too early with the risk of igniting more price pressures with a less restrictive monetary policy. Their main arguments lost strength though over the past month with official September CPI inflation peaking at a lower level than feared and underlying dynamics showing a weakening impact from food inflation (also in preliminary October data). The latter has an outsized impact in shaping inflation expectations. Also arguing in favour of a steady outcome today is uncertainty related to the November 26 Budget presentation by Chancellor Reeves. The doves inside the BoE are more concerned about a rapidly deteriorating UK labour market, witnessed both by the official data and in the less formal business circuit often mentioned by BoE Bailey. Implementing the Fed’s “risk management” strategy argues in favour of lower the policy rate today, especially if backed by a more benign inflation dynamic in the new quarterly Monetary Policy Report. The (negative) economic impact of the tax-lifting budget might also in the end be bigger than the (if any) inflationary effects. From a market point of view, we think that sterling is vulnerable both to a dovish pause and especially to an effective rate cut (our preferred scenario). UK money markets only fully discount another 25 bps move lower by the February 2026 meeting and only 50 bps of cumulative decreases over the next 12 months. EUR/GBP broke 0.8768/69 resistance last week with follow-up action levels above 0.88. The 2023-top at EUR/GBP 0.8979 is the next big reference.

News and views

The Brazilian central bank left its policy rate unchanged at 15% for a third consecutive meeting. Vigilance remains warranted, but the tone of the communiqué shows some more comfort that ‘maintaining the interest rate at its current level for a very prolonged period will be enough to ensure the convergence of inflation to the target’. In September, the central bank still formulated this assessment in a more conditional way. With respect to the domestic economy, the BCDB sees economic growth moderating but the labor market is still showing strength. Headline inflation and measures of underlying inflation have shown some improvement but like inflation expectations for 2025 (4.5%) and 2026 (4.2%) remain above the 3% inflation target. Inflation projections show a declining path from 4.8% for this year and 3.6% for next to 3.3% at the end of the policy horizon (Q2 2027; from 3.4% in September). The real (USD/BRL 5.357) is holding strong after already a good rally against the dollar earlier this year (YTD + 13.5%).

The National Bank of Poland (NBP) yesterday further reduced its policy rate by 25 bps to 4.25%. The NBP says that taking into account a decline in inflation and an improved inflation outlook for the coming quarters, in the Council’s assessment, it became justified to adjust the level of the NBP interest rates. October CPI inflation declined to 2.8% Y/Y (from 2.9% in September 2025), largely due to lower annual growth of food prices, but the NBP estimates that inflation net of food and energy prices also decreased, even as services price growth remains elevated. In its new forecast, the NBP sees the 2025 inflation target range at 3.6-3.7% (from 3.5%-4.4%). For 2026 the range is set at 1.9%-4% (from 1.7%-4.5%) and for 2027 at 1.1%-4.1% (from 0.9%-4.3%). The NBP has an inflation target of 2.5% (+/- 1%). Further decisions of the Council will depend on incoming information regarding prospects for inflation and economic activity. Fiscal policy, recovery of demand in the economy and elevated wage growth remain risk factors for low inflation. Uncertainty stems also from the level of energy prices and inflation developments abroad. The zloty yesterday gained modestly after the decision closing near EUR/PLN 4.256.

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