BOE review

The Bank of England voted to keep rates on hold today, but there could be rate cuts coming as soon as next month. The most interesting part of this meeting was the vote split, which was 5-4 in favour of remaining on hold. Also, for the first time we got detailed reasons why each member voted as they did.

An early holiday gift from the BOE now on the cards

The immediate market reaction to the decision was a rush to reprice December rate cut expectations, and, surprisingly, the pound is higher vs. the USD and the EUR. The interest rate swaps market is now pricing in a 65% chance of a rate cut next month, this is up from 29% at the start of this week, there is also a 52% chance of a cut in February.

Hopes for rate cut hinge on Bailey voting for a rate cut next month

Whether or not the Bank does cut rates in December could depend on the doves at the MPC persuading other members to join them in voting for a cut next month. Sarah Breeden, Swati Dhingra, Dave Ramsden, and Alan Taylor need one member to join them next month to ensure rates are cut. Based on MPC members’ views, Andrew Bailey could be the next hawk to switch to the dovish camp. He said that upside risks to inflation have been less pressing since August, and he sees further easing if the disinflation trend becomes more entrenched, i.e. if CPI continue to surprise on the downside.

Claire Lombardelli also sounded less hawkish than other members, she said that weaker consumption is compelling, and that she expects headline inflation to fall, although she is concerned about inflation expectations for households. On the other hand, Catherine Mann, Megan Greene and Huw Pill all sounded solidly opposed to rate cuts for the medium term due to inflation risks.

BOE still sees slow return to target for CPI

Although UK bond yields are lower today, the decline has been small compared to the rapid repricing in December rate cut expectations. The 10-year yield is lower by 1.5 bps and the 2-year by 2.5bps, which is moderate. The reason for the restrained reaction in the bond market is the BOE’s CPI forecast that was released in the Monetary Policy Report. The Bank sees inflation continuing to only return to target in 2027, there was some hope that they could revise it to 2026. Thus, the downside for yields could be capped for now. This is limiting GBP downside and this is one reason why the pound is the second-best performing currency in the G10 FX space on Thursday.

GBP future moves depends on where yields go next

The pound has been moving closely with the UK – US 10-year sovereign yield spread, as you can see in the chart below. UK yields have fallen sharply in the past month, and a lot of the dovish impulse at the BOE has already been priced into the UK bond market. This is why the pound’s decline is on pause for now, and we could see a short-term GBP recovery. GBP/USD has broken above its short-term moving averages, which suggests that momentum is to the upside in the next few days. Key resistance lies at 1.3170, the high from the start of this week.

Chart 1: UK and US 10-year sovereign bond yield spread and GBP/USD

Source: XTB and Bloomberg

UK real estate sector gets a boost from the BOE

The equity market is also reacting to the BOE’s meeting. Real estate is the second-best performing sector on the FTSE 100 today, and is higher by 1.21%, led by Land Securities and Seagro. There could be further upside to come, as Seagro is up only 2% so far this year and is underperforming the overall UK index.

FTSE 250 companies are also benefiting from December rate cut hopes, including British Land, Derwent London and Shaftesbury Capital.