What's takeaway 1 on Bank of England to diverge from the Fed as inflation remains cool?

The Bank of England may cut rates by 2027, diverging from market expectations of rate hikes.

What's takeaway 2 on Bank of England to diverge from the Fed as inflation remains cool?

UK private sector wage growth has fallen to new lows, complicating the BoE's inflation targets.

What are the market implications for Bank of England to diverge from the Fed as inflation remains cool?

Traders should closely monitor the GBP/USD level around 1.075, particularly as labor market reports unfold, which could drive the market toward reassessing the BoE's interest rate outlook. Any signs of a further deterioration in wage growth or employment could signal a shift in market positioning toward GBP weakness.

What are the risks to this view on Bank of England to diverge from the Fed as inflation remains cool?

Should there be a sudden unanticipated improvement in wage growth or employment data, it could challenge the desk's bearish outlook for BoE rate cuts, potentially leading to rapid adjustments in market positioning towards bullish expectations. Additionally, a more aggressive than expected Fed could also bring renewed pressure on GBP relative to USD.

Bank of England to diverge from the Fed as inflation remains cool

What the desk is arguing

The desk believes the trajectory of the Bank of England's policy will diverge sharply from that of the Federal Reserve, in light of the indicators pointing towards a softer UK economy. Per the full note from ING, the analyst James Smith emphasizes that cooling inflation and a fragile jobs market are likely to compel the BoE to consider rate cuts sooner than the market anticipates.

Importantly, the UK’s employment data illustrates that while some sectors show resilience, the broader trend indicates layoffs are persisting, particularly in consumer services where payroll declines exceed 3% annualized. This backdrop leads to wage growth near the 3.25% threshold that the BoE considers optimal for their 2% inflation target, further complicating their monetary policy decision-making process.

Where it sits in our coverage

The consensus target for GBP/USD is pegged at 1.075, with projections ranging between 1.04 and 1.12. Notable firms providing forecasts include:

jpmorgan: target of 1.10 for Mar26
bofa: target of 1.04 for Mar26

The desk's expectation for rate cuts aligns closely with the perspectives of jpmorgan, positioning itself on the upper end of the provided range, while diverging significantly from bofa, which maintains a more bearish outlook.

How other firms see it

Most aligned firms, including jpmorgan, see potential for a more dovish BoE stance, although bofa holds a contrary viewpoint suggesting the central bank may tighten further. This split indicates varying degrees of confidence about the UK economic recovery and inflation trajectory compared to the US.

Related currency pairs to monitor include GBP/USD and EUR/GBP as movements in these markets could highlight shifts in market sentiment towards the BoE's policy direction.

What the calendar says

With no imminent high-impact events for the UK in the upcoming month, the focus will hinge on how the market reacts to ongoing labor market reports, which could provide additional data points ahead of the BoE's next scheduled announcements.

Articles Bank of England to diverge from the Fed as inflation remains cool Published 11:35 United Kingdom Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Contrary to market pricing, we think the combination of a fragile jobs market and cooling core inflation should help unlock Bank of England rate cuts in 2027 James Smith Markets see three Bank of England rate hikes ahead. We think at least one cut is more likely The UK is not like the US – rates are still restrictive US Fed Chair Kevin Warsh’s hawkish antics at Jackson Hole, together with the latest rise in energy prices, mean markets are now pricing three rate hikes from the Bank of England over the next 12 months. We disagree; we think the Bank will have cut rates at least once by then.

Warsh’s argument that the level of US interest rates is no longer restrictive is much harder to make in Britain. Take the jobs market. The good news is that private sector hiring, outside of hospitality and retail, is no longer falling, according to the payroll numbers.

The bad news is that the hiring surveys generally still point to further reductions in headcount. And in consumer services, payroll numbers are falling in excess of 3% annualised, and that rate of decline, if anything, is still getting worse. The result is that private sector wage growth, at 2.8%, is hitting new lows.

And even after adjusting for so-called ‘compositional effects’ in the data, it has finally reached the 3.25% level which the BoE told us earlier this year is consistent with a 2% inflation target in the medium term. Forward-looking surveys don’t point to an imminent turnaround. 'Energy intensive' inflation hasn't picked up Based on energy intensity data from the ONS. Calculations by ING Source: Macrobond, ING "> Based on energy intensity data from the ONS.

Calculations by ING Source: Macrobond, ING Growth is likely to slow as the year goes on All of that is hard to square with the solid growth data in the first half of the year. In part, that is simply because the inflation shock hasn’t been as bad as it could have been. But there are three broader problems with this.

First, ever since 2022, growth has been much stronger in the first half of the year than the second – and the trajectory of monthly GDP this year has very much followed this familiar path. We, like many others, suspect that this is down to seasonal adjustment challenges. And that points to weaker growth in the second half of the year.

Second, growth is very concentrated. This isn’t new, admittedly, but three sectors – IT, health/social care and transport – are contributing half of the UK’s 1.1% annual growth rate, despite only making up 17% of economic output. Strong CapEx in the first half tentatively suggests the UK is benefiting from a scaled-down version of the AI data centre boom currently engulfing the US.

Third, construction has been very weak. Private housebuilding is still 20% below pre-Covid levels, a neat encapsulation of tight monetary policy in a rate-sensitive sector. Then there’s inflation.

Our calculation of ‘energy intensive’ inflation has actually fallen so far this year, even accounting for the impact of last year’s water and road tax hikes. There are lags involved, admittedly. But the fact that food inflation in particular has been falling should be welcome news for the BoE hawks.

The Bank’s favoured measure of “core services” inflation is also down so far this year. Barring a sustained and material spike in energy prices, we think by early next year the BoE will be comfortable pivoting in a more dovish direction. A lot will depend on October’s budget.

But for now, we’re pencilling in a rate cut for April 2027. United Kingdom UK inflation 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.

Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author James Smith Developed Markets Economist, UK James is a developed market economist, responsible for ING's view on the UK economy and Bank of England. He graduated from the University of Bath with a degree in economics and joined ING in 2015. In this article The UK is not like the US – rates are still restrictive Growth is likely to slow as the year goes on

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