BoE strikes 'overly optimistic' note on budget impact, expect fireworks at March meeting but not before

There was nothing groundbreaking in today’s Bank of England announcement. The vote delivered little drama beyond Governor Bailey’s predictable defection, as the stark divide between the hawks and doves shows no signs of narrowing.

The MPC expects the UK economy to flatline in the fourth quarter, although it sounded surprisingly upbeat on the growth impact of the budget. This favourable assessment appears to stem from expectations that the fiscal measures will lead to materially weaker inflation in 2026, a view that we regard as overly optimistic.

We think that the committee is maintaining flexibility. Governor Bailey has kept the door open to further easing, while indicating that there is limited room for further cuts. The bank’s commitment to a gradual approach means that we think that a February cut is highly unlikely, although we expect the March meeting to be a ‘live’ one. We see one or two more cuts in 2026, but all will be dependent on incoming data.