Bank of England decision points to prolonged pause
The Bank of England's recent decision to maintain the policy rate at 3.75% reinforces a narrative of caution, with market participants now anticipating a rate cut as early as 2027. Per the full note source, the tone of the central bank's communication suggests minimal appetite for tightening amidst stabilizing inflation expectations. The composition of the committee, with a 7-2 vote in favor of holding rates, underscores the division between hawkish and more dovish policymakers, hinting that only significant external shocks could prompt a shift in stance.
What the desk is arguing
The desk interprets the Bank of England's decision as indicative of a prolonged pause in monetary policy adjustments, suggesting that the next significant action may not materialize until 2027. This assessment aligns with the cautious language used by the Bank, reflecting a stabilization in inflationary pressures and a lack of conviction among committee members regarding the need for further hikes.
Supporting this view, the latest Consumer Price Index (CPI) data shows restrained pricing power, which bolsters the outlook against immediate hikes. Despite calls from members like Catherine Mann for an activist hike, committee dynamics are leaning towards a wait-and-see approach, needing stronger evidence of inflation risks before acting.
Where it sits in our coverage
Our consensus target for GBP/USD is set at 1.075, with a range between 1.04 and 1.12. Notably, jpmorgan has a more bullish target at 1.10 for March 2026, while bofa takes a more pessimistic stance with a target of 1.04.
With the desk's position aligning closely with the consensus outlook, we find ourselves positioned at the lower bound of the range, indicative of a cautious stance reflective of the BoE's current dovish tilt.
How other firms see it
Many firms share a cautious outlook similar to our desk's sentiment, anticipating prolonged pauses or even cuts in the near term. However, firms like bofa maintain a more pessimistic perspective with lower target expectations.
Monitor the GBP/EUR rate as it closely follows the trajectory of Bank of England's policy adjustments. Potential movements in this currency pair will provide significant context to the shifting economic landscape influenced by the BoE's decisions and broader market dynamics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01BoE maintains rate at 3.75%, signaling prolonged pause.
- 02Next potential rate cut anticipated around 2027, reflecting caution.
- 03Committee remains divided, with a 7-2 vote to maintain rates.
- 04Limited pricing power noted in recent CPI data.
Market implications
Traders should watch for GBP/USD fluctuations around the 1.075 level, as it encapsulates current market sentiment following the BoE's decision. Given the absence of high-impact events in the immediate calendar, short-term positioning will be critical for gauging sentiment shifts.
Risks to this view
A significant geopolitical development, particularly in the Middle East that would cause a spike in energy prices, could reverse this dovish outlook. Additionally, unexpectedly high inflation data in upcoming releases may also provoke a reassessment of the current monetary policy stance.
Older quick take Quick take 12:45 United Kingdom Bank of England decision points to prolonged pause There's nothing in today's decision that changes our mind that the next move is likely to be a rate cut in 2027. It feels like it would take a lot for the five more neutral-to-dovish members of the nine-strong committee to vote for a hike, barring the Iran deal falling apart and energy prices moving materially higher The Bank of England in London, which today held rates steady at 3.75% Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download James Smith Developed Markets Economist, UK The Bank of England has kept rates on hold at 3.75%, and nothing in this decision changes our view that the next move is likely to be a cut. Admittedly, there’s not a lot to go on this time.
The new statement looks deliberately anodyne – and we’ll have to wait until late July for new forecasts or a press conference. Nor does it look like officials themselves have shifted their views too much, aside from Megan Greene who joined Huw Pill in calling for an immediate hike. The overall committee voted 7-2 to keep rates on hold as we and many others had expected.
Catherine Mann, another hawk, made the case for an activist hike – but in the end was persuaded to vote for a hold. But there are hints, if not much more than that, that the old battle lines on the committee are re-emerging. It feels like it would take a lot for the five more neutral-to-dovish voters to back a hike, barring a significant flare-up in the Middle East.
They appear increasingly confident that second round inflation effects are unlikely. And the data backs them up. For all the fears of second-round effects this time last year, when we had a bout of food inflation, plus higher employer taxes (lifting costs for firms) and a steep increase in the minimum wage, the latest CPI data doesn’t bear them out.
Pricing power appears limited – or at least more so than in 2022 during the last energy crisis. And the impact is more clearly visible in the jobs data, where payrolled employment in consumer sectors has consistently fallen (and the rate of decline, if anything, is getting worse). Private sector wage growth has further to fall.
If the Iran deal holds and energy prices stay at current levels, inflation is likely to peak at 3.5% later this year. That’s comfortably below a 4% threshold, which BoE research last year suggested was more likely to trigger a persistent bout of price pressure when breached. A Bank of England rate hike now looks unlikely barring a severe spike in energy prices in July, which isn’t our base case.
We expect a prolonged pause and cuts to resume in 2027. Bank of England Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
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