BoE REVIEW: BoE cuts rates to 4.0% after historic split vote, signalling deeper policy divide

As expected, the BoE opted to cut the Base Rate by 25bps to 4.0%, sticking to its quarterly cadence of loosening policy. The greatest source of surprise came via the vote split with a 5-4 outcome after a second round of voting. The first round had seen four votes for unchanged, four for a 25bps reduction and Taylor back a deeper 50bps reduction. Taylor opted to switch to a shallower 25bps vote in order to avoid an unchanged rate. This was the first time in the BoE's history that a vote had gone to a second round of voting and has emphasised how split policymakers are in their views. Those wanting to leave policy unchanged are placing greater emphasis on the risk of policy not meeting its target on a sustainable basis, whilst those backing a 25bps move recognise progress on disinflation. Taylor's larger 50bps initial vote was due to the downside risks to inflation and the risk of recession. Within the statement, the Bank opted to maintain guidance of a "gradual and careful" approach to rate cuts but remove language that monetary policy needs to "remain restrictive". For the accompanying MPR, 1-3yr inflation forecasts were raised, whilst 2025 was upgraded and 2026/27 projections were left unchanged. It is worth noting that the subsequent repricing in BoE rate expectations may have made these forecasts redundant, given they are predicated on the market curve. Following the decision, odds of a November cut have fallen to less than 50% vs. circa 64% pre-announcement. On the balance sheet, the next decision on the Bank's Gilt remit is not due until September. However, ahead of this, the MPR noted that movements in long-end yields are primarily due to global factors. This could suggest that any reduction in long-end Gilt sales next month may be modest. The subsequent press conference with Governor Bailey delivered little in the way of takeaways aside from Bailey reaffirming that the path for rates remains downwards and domestic price and wage pressures have continued to abate. Overall, the fears over inflation on the MPC are clearly greater than what the market had positioned for. As such, absent a material deterioration in the labour market or underlying inflation, the November decision will likely be a close call. 

07 Aug 2025 - 14:15- Fixed IncomeData- Source: Newsquawk