We expect the Bank of England to cut the Bank Rate to 4.00% on Thursday 7 August in line with consensus and market pricing. We expect the vote split to be 6-3 with the majority voting for a 25bp cut and Greene, Mann, Pill voting for an unchanged decision. Note, this meeting includes updated projections and a press conference following the release of the statement.
Overall, we expect the BoE to stick to its previous guidance repeating that a “gradual and careful approach to removing monetary policy restraint remains appropriate”. Since the last meeting in June, data has been a mixed bag. Growth has surprised to the downside with the economy contracting by 0.3% m/m in April and 0.1% m/m in May, on course to undershoot the BoE projections for Q2 2025 of 0.25%. The labour market has shown more pronounced signs of cooling with private sector regular wage growth at 4.9% 3M/YoY in May, lower than the BoE’s projections of 5.2% but remains at elevated levels. Similarly, payrolls have dropped the past months, and the unemployment rate has edged higher to 4.7%. On the other hand, inflation has been stronger than expected and inflation expectations have risen. Headline inflation rose to 3.6% y/y in June with food prices delivering the relative biggest overshoot compared to the MPC’s forecast. On the back of this, we think the MPC is likely to lift the near-term projection for inflation slightly.
BoE call. We expect the BoE to stick to quarterly cuts, leaving the Bank Rate at 3.75% by YE 2025, which is aligned with market pricing. However, we expect the cutting cycle to extend throughout 2026 leaving the Bank Rate at 2.75%. This is more dovish than markets, which prices a bottom of 3.50% a year from now.
Market reaction. We expect a muted market reaction as we expect the BoE to refrain from altering its current guidance. More broadly, we stay negative on GBP. An investment environment characterised by elevated uncertainty and a positive correlation to a USD negative environment, in our view, favours a weaker GBP. Tentative signs of a weaker growth outlook for the UK economy also acts as a headwind for GBP. We therefore expect EUR/GBP to move higher towards 0.89 on a 6-12-month horizon.