Amid the volatility around Trump tariffs which is all-consuming at present, we have a host of top tier calendar events, including Thursday’s Bank of England meeting. A quarter point rate cut is firmly expected by money markets, and Governor Bailey has remarked that market pricing for a cut at this meeting was ‘in a reasonable place’. The bank seems content with cutting once per quarter, while there’s not much expectation it will say much about its future intentions this week.
The economic backdrop to the upcoming meeting is one clouded by disappointing growth with monthly GDP falling short of expectations in the past three releases. Survey data has also continued to be downbeat with the latest Composite PMI adding to the gloom. On the inflation front, headline CPI slipped to 2.5% from 2.6% y/y, core CPI declined to 3.2% from 3.5% y/y, with the services print slipping to 4.4% from 5.0%. That is lower than the MPC forecast of 4.7%. However, the headline print is probably a touch higher than the bank predicted in November, due to rising energy costs.
Vote split and forecasts
An 8-1 vote in favour of that 25bp cut is forecast, with arch-hawk Catherine Mann once again dissenting. She is yet to vote for a rate cut and had consistently voted for further hikes, long after the Bank’s tightening cycle had ended. There is the risk of a dovish twist here, as we note December’s vote had three MPC members voting for a cut, which was a minority but more than expected.
New growth and inflation projections are released with the medium-term figures set to be cut, while near-term inflation is likely to rise. Fourth quarter GDP will probably be flat, but the BoE had estimated this would be 0.3%. That lowers the starting point for 2025 annual growth.
Market reaction
The MPC is unlikely to confirm what it plans to do next, which means it will adopt a ‘gradual approach’ to lowering rates.  Swaps now price in around 80bps of easing by year end, which is up sharply from just 29bps in mid-January. That was when the BoE was more aligned with Fed pricing which has diverged, especially since the onset of tariffs which are an obvious uncertainty.
GBP has been one of the least badly hit G10 currencies this week, arguably because the UK runs a trade deficit with the US and goods exports to GDP are relatively small. A bias towards 1.22 in GBP/USD is possible on a dovish vote split or a big growth forecast downgrade, though much is dependent on the US trade story
More broadly, sterling has recovered from the mid-January gilt-led sell-off but is still vulnerable given the UK’s fragile fiscal position with its high current account deficit and public deficit. The slim headroom the Chancellor gave herself has all but gone, which means continued expansionary fiscal policy has left the UK as the mercy of the global backdrop on yields.