BoE to drop hawkish rhetoric and signal that further rate cuts are nigh

We suspect that both Dhingra and Taylor, who opted for a jumbo cut in May, will again vote for an immediate cut, probably of 25 basis points, although 50bp is not out of the question. Markets expect the remaining seven members to side in favour of no change, but we wouldn’t be overly surprised to see at least one additional dissenting vote in support of looser policy.

Aside from the voting pattern, market participants will be attentive to the bank’s forward guidance.

For some time now, the Bank of England has stressed that further base rate cuts would be both “gradual and careful”. Given the latest jump in inflation, and the prevalence of the aforementioned upside risks to consumer prices, notably stemming from the conflict in the Middle East, we think that the BoE will maintain this phraseology for now.

There is a growing risk, however, that this hawkish bias is jettisoned on Thursday, which would not only cement the case for another cut no later than September, but would also materially raise the possibility of a rate reduction at the subsequent MPC meeting in August.

For now, we are sticking by our call for just two further cuts to the base rate between now and year-end, possibly in August and November, when the latest Monetary Policy Reports will be released.

We don’t believe that the MPC will entertain the idea of lowering rates more aggressively than that just yet, and we think that any downside in sterling off the back of Thursday’s announcement will be limited. That said, a formal abandonment of the “gradual and careful” rhetoric would likely induce some selling pressure in the pound.