BOE STATEMENT: Bank Rate cut to 4.25% (exp. 4.25%) in a 7-2 vote (exp. 9-0); Mann and Pill voted for unchanged; Dinghra and Taylor voted for a larger 50bps cut

VOTE SPLIT:

• Policymakers voted 7-2 to cut rates; Mann and Pill voted to keep rates unchanged; Dhingra and Taylor voted for a larger 50bps reduction


• Among the five members who backed a 25bps cut, most felt global trade news provided a case for a cut, others thought the case for a cut was already clear

LANGUAGE:

• BoE reiterates rates will need to continue to remain restrictive for sufficiently long until risks to inflation return sustainably to target in the medium term have dissipated further


• BoE repeats "monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium-term have dissipated further


• BoE Governor Bailey says the last few weeks have shown unpredictability of global economy, so need to stick to gradual and careful approach to further rate cuts


• Says monpol not on a preset path

TRADE:

• BoE says the increase in trade tariffs means global growth prospects have weakened, but drag on UK growth and inflation likely to be smaller

INFLATION:

• Progress on domestic inflation is generally continuing, pay growth expected to slow significantly over the rest of 2025


• Expects inflation to peak at 3.5% in Q3 on a quarterly basis (prev. saw 3.75%)


• BoE Governor Bailey was inflation pressures are easing, so the MPC was able to cut rates today

Reaction details (12:18)

• 
  GBP/USD fell from 1.3259 to 1.3239 in an immediate move before paring this and then lifting to 1.3326 10 minutes later.


• At the same time, Gilts fell from 93.59 to 93.14 in an immediate reaction, before extending to 92.89 session trough over a four minute period.

Market Pricing (prev. adjusted to remove May's 25bps cut)

• Jun -5.5bps (prev. -12.8bps)


• Aug -21.5bps (prev. -33.7bps)


• Sep -35.9bps (prev. -48.7bps)


• Nov -50.3bps (prev. -63.7bps)


• Dec -58.6bps (prev. -71.5bps)

Analysis details (12:13)

• A cut by 25bps as expected however the decision was subject to much more division than anticipated. The decision to cut was 7-2, with Mann and Pill voting to keep rates unchanged; a view justified by short-end movements in market pricing, labour market resilience and firming of household inflation expectations. Surmising that, in their view, holding the Rate would ensure policy remained sufficiently restrictive to “weigh against stubborn inflationary pressures”.


• From the seven who voted to cut, two voted for a 50bps reduction. Unsurprisingly, Dhingra was one of those and joined by Taylor, an outcome that was seen as a possibility by some desks heading into the meeting. Their justification was there are factors pointing to “potential downward risks to global growth and world export prices” and the risk that over the medium term a stance that is too restrictive could open up an “unduly large output gap”.


• The five majority who voted for a 25bps cut was also somewhat divided until fairly recently. With “most” members in the group judging that until recent developments on global trade the decision would have been finely balanced between a cut and hold. However, recent developments were enough to push them to a cut. “Other” members from the group of five had a cut as being fairly clear, irrespective of recent updates.


• From the statement, the language reiterated that a “gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate”; some desks had speculated that this language could be removed, however the clear divide on the MPC perhaps cements the open nature of their guidance, for now at least.


• Elsewhere, near term inflation forecasts lowered, 2025 growth view upgraded while 2026 was downgraded. However, these forecasts could well be out of date in just a few hours when the UK-US trade update is announced by President Trump.


• In short, a 25bps cut as expected but with much more division on the MPC than expected. We look for clarity from Governor Bailey on what the “recent developments” were that pushed “most” of the five members who voted for a 25bps cut to cement their view and what, if anything, the division means for the quarterly pace to easing. Note, as mentioned, a UK-US announcement due this afternoon which could make all of the underlying assumptions stale.

08 May 2025 - 12:02- ForexImportant- Source: Newswires