BoE to lower inflation and growth expectations at MPC meeting
While the Bank of England is universally expected to cut interest rates this week, the key to the reaction in the pound will be the bank’s accompanying communications.
We expect the bank to revise lower both of its inflation and growth projections for 2025, with the committee likely to say that US tariffs will weigh on UK growth and dampen price pressures.
Yet, with swap markets currently pricing in as many as 90 basis points of cuts during the remainder of the year, we think that it will be difficult for the BoE to meet these dovish expectations, and the MPC will likely wish to maintain optionality.
Sterling has lagged most of its major peers lately, and we think that any hint from the central bank that markets have got ahead of themselves in pricing in cuts could be a catalyst for pound outperformance.
In addition to its relatively low exposure to US tariffs, the UK economy may also benefit from closer EU ties under the Labour government. We do not think these positive factors are fully priced in by currency markets.
Author
Matthew Ryan, CFA
Ebury
Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.
