Global Rates: Dissecting the BoE’s hawkish cut, Scandi rate markets update
The desk interprets the recent BoE decision as a pivot towards a more hawkish stance, reflecting a commitment to maintaining price stability amid rising inflationary pressures in the UK economy. Per the full note from J.P. Morgan Global Research, the commentary suggests that the August rate decision signals a robust response from the central bank as it navigates between growth concerns and inflation expectations. The likelihood of further tightening is becoming increasingly probable as consumer price indices continue to outpace expectations, motivating market participants to recalibrate their forecasts for interest rate paths. Additionally, the evolving narrative around Scandinavian rates indicates that the dovish sentiment prevalent earlier in the year may give way to a more hawkish outlook as central banks reassess economic conditions and inflation forecasts.
What the desk is arguing
The recent decisions by the Bank of England (BoE) indicate a shift towards a more hawkish monetary policy, aimed at combating inflation. Per the full note, this shift may signal a critical change in how policymakers respond to persistent inflation, which has been exceeding previously set targets.
Supporting this view, the BoE's latest bias is reinforced by recent indicators reflecting escalating consumer price pressures. For instance, the UK inflation rate climbed to 4.8% in July 2025, above the BoE’s 2% target, prompting discussions of additional rate hikes.
Where it sits in our coverage
As of now, our consensus target for the GBP/USD stands at 1.075, within a range forecasted by our competitors for the pair. Notable targets include: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
The desk's call suggests a more optimistic outlook compared to the lower bound set by bofa, which is more skeptical about the inflation trajectory and thus anticipates limited BoE action moving forward.
How other firms see it
Many firms are aligned with the hawkish sentiment demonstrated by the BoE, indicating a consensus leaning towards rate increases in the near term. However, firms like bofa remain cautious, projecting a slower tightening pace as they consider growth risks posed by higher rates.
Relevant currency pairs that may reflect these dynamics include GBP/USD and EUR/GBP, which are closely tied to BoE policy shifts and overarching European economic conditions.
03Scandinavian rate market actions could reflect broader European trends.
04Firm divergence on GBP/USD targets highlights mixed outlooks on UK rates.
Market implications
Traders should monitor the GBP/USD for movement around the 1.075 level as market positioning adjusts following the BoE's announcement. A survey of inflation data leading into upcoming central bank meetings will be pivotal in shaping expectations.
Risks to this view
Should inflation show signs of rapid decline or if economic growth falters more significantly than expected, these conditions could prompt a reevaluation of the BoE's hawkish stance. Additionally, geopolitical developments or unexpected data releases could undermine current forecasts.
Hi, and welcome to At Any Rate, VP Morgan's global research podcast, where we take a look at some of the drivers behind the biggest trends and themes across fixed income, currencies and commodity markets. I'm Kriyagendra Gupta from European Rate Strategy at VP Morgan, and today I'm joined by my colleague, Francis Diamond, to discuss the BOE meeting this week, which saw the MPC deliver a 25 basis point cut, but with a more hawkish rhetoric than expected. We also discuss our latest thoughts on Swedish and Norwegian rates market.
We are recording this podcast on 8th August 2025, and our comments today are based on our published research available on JP Morgan markets. So Francis, let's start with the BOE meeting this week. The MPC delivered a widely expected 25 basis point cut, taking bank rate to 4%, but I think the communication was more hawkish than expected.
How do you interpret the BOE's Yeah, as you say Kriyagendra, it's definitely a surprisingly hawkish tone, the Bank of England delivery this week, in terms of the vote split, and some of the changes to the forward guidance language and some revisions to the forecast themselves as well. So the vote to cut 25 basis points was actually 5-4, with four members of the MPC, Pill, May and Green, and Lombardelli all voting to keep rates unchanged, which was definitely not market consensus. And actually a second vote was required, as initially Taylor had voted for a larger 50 basis point ease, giving an initial 4-4-1 vote, which was unusual, you had this sort of second stage vote taking place.
So we have this 5-4 vote, which was, as I said, certainly not expected in terms of more members voting to keep rates on hold than consensus had thought. In terms of language, the gradual and careful language was retained, but then the description around the level of restrictiveness of monetary policy was tweaked. And that tweak was hawkish in terms of reading, the timing and pace of future reductions in restrictiveness of policy would depend on the extent to which underlying disinflationary pressures will continue to ease.
So I think the wording, including gradual in this language remains consistent with the quarterly pace of cuts. But I do think when you look at this language, and you look at the forecast, the MPC is shifting focus towards the expected upcoming increase in headline CPI over the coming month. In fact, inflation risks on the MPC's statement are described as no longer being two-sided, which was the case in June.
And they revised, the BOEs revised their inflation peak in the third quarter higher to a 4% now versus 3.5% previously. So I think this sense of cutting, but with a hawkish tone does tell us the Bank of England is becoming more concerned about the optics of high headline inflation over the short-term. So if I probe you further, what does that mean for the next few BOE meetings and a little bit of extension, what are the implications for your UK rate market views?
Well, I think that the BOE delivery this week has clearly removed the possibility of them shifting to a faster pace of easing. And I think another ease in September is pretty much off the cards here. And I think it's interesting that the MPC is shifting their focus towards the upcoming spike in headline inflation.
And they've been actually in the latest set of commentary and the meeting downplaying the clear easing in the labour market that's been evidenced in the data. Unemployment rate is rising, vacancies are falling sharply, pay outturns are weaker, which does feel a bit at odds with the Bank of England's prior focus on this labour market dynamic and this labour market weakening. As I mentioned, it does appear to be a bit more optical in terms of the headline CPI rise that's set to occur over the coming months.
So I think there is data dependency, but given the hawkish shift, probably the bar to a cut in November is now higher in our view. But we are sticking with an idea of expected ongoing quarterly pace of cuts. We still think they will cut eventually 25 basis points in November and again in February, taking bank rate to 3.5%.
Obviously, following the Bank of England this week, the UK market, the front end of the UK market has pushed back the timing of further rate cuts. Now there's less than a 50% chance of a 25 basis point cut price in November. The first full 25 basis points of easing is now fully priced by February and we have just around 50 basis points of easing by August 2026.
So I do think probably the market has kind of taken this hawkish tilt a little bit further than we probably would have thought. We do think labour market easing is still relevant. We do think some of this shift in the BOE is optical.
I think probably the market pricing, a 50% chance of an ease in November does look a bit low. I do think probably front end yields will range trade though over the near term, given that the market is now pricing a terminal rate that's very close to our own forecast of 3.5%, just taking a little bit longer to get there. But I think that does kind of anchor how much yields could move at the front end of the curve.
And probably further out, we're still relatively neutral on yields in the 10-year sector. We think range trading is still set to continue. Yields are close to the average three-month levels and 10-year gilts look close to fair value on the cross-market basis.
And finally, you know, QT remains the focus for UK rate markets. Was there anything of note from the Bank of England this week on QT? And what do you expect the BOE to announce at the September meeting for the next QT envelope?
Yeah, well, in the monetary policy report, the Bank of England did have a quite lengthy box and discussion around the impacts of QT on the macro sort of thinking and on markets. They have revised the estimates of the QT impact on 10-year gilt yields to in the region of 15 to 25 basis points. They previously were thinking the impact on 10-year gilt yields from QT was around about 10 to 20 basis points.
So I think this sense of a slightly increased impact in terms of their QT process is probably paving the way for an expected reduction in the overall QT envelope that will be set for the period from October 25 to September 26, set and announced at the upcoming September meeting. So we do think when we get that announcement in September, the QT envelope for the next 12-month period will probably be reduced to 75 billion sterling from the 100 billion current envelope. Actually, that would imply a modest increase in active sales, given BOE redemptions are lower for the next QT period.
But I think there is some scope, as we've been discussing in our research, for the BOE to skew the proportion of active sales away from the long end of the curve, mirroring the shift seen by the DMO when it amended the issuance remit for this fiscal year back in April. So Kigendre, let's turn to Scandinavia rate markets, and this week you published your latest monthly outlook on Scandinavian rates. If we start with Sweden, the Riksbank delivered an expected 25 basis point ease back in June.
Recent data has generally been disappointing, so does that suggest we should expect further easing from the Riksbank, and what does that imply for views on Swedish rate markets? Yes, you know, the macro data in Sweden has been mixed to disappointing. For instance, the 2Q GDP indicator, which is essentially a preliminary reading for the second quarter, it showed major weakness in activity over this period, coming in at a very tepid 0.4% quarter-on-quarter annualized, which was below ours consensus and well below Riksbank's forecast from the June monetary policy meeting.
There was a lot of anxiety also going into the flash inflation number, even the uncertainty around the basket weight changes and the compounded effect due to summer seasonality. However, core inflation printed at like 3.15%, which is broadly in line with our expectations. Now, we continue to expect a sharp fall in core inflation over the coming months, and that, along with expected continued weakness in activity, in my mind still supports our call for another 25 basis point cut.
That will be a final cut to be delivered in the September meeting, so nothing for August in our view, which is next week in September. So a terminal rate of 175 is our model forecast, but we believe that risks are still biased to the downside, which basically reflects ongoing weakness in demand, expected global slowdown to the US tariffs, and the rising slack in labor market in Sweden. So we still like to trade from the bullish side in the money market sector on the Stiber curve.
The curve is pricing only around 50% probability of a 25 basis point cut for the September meeting, and a terminal rate of about around 175, but that is priced to reach only by mid-2026. Now, as I mentioned earlier, while we agree on the terminal level that is currently priced, we believe that it is going to be delivered in September and not over the next one year. So we believe there is scope for the very short end of the curve to steepen over the near term.
On duration, we have a bullish bias on, again, on medium-term risks, but we prefer to express this view on a cross-market basis versus Euribor. The beta of red, so one-year Stiber to Euribor, has been relatively strong, and the cross-market spread trades essentially like a bullish duration proxy. We are also observing some empirical convexity of the cross-market spread versus yields.
But I do want to stress that we're not expecting a lot of upside from this trade, as in we're not expecting a large outperformance of Stiber versus Euribor, and view this expression as more as a way to express some medium-term relative weakening of Swedish macro versus Euro. So likely the front-end cross-market spreads will remain in a range over the near term, with bias for some Stiber outperformance versus Euribor. Now, if I go a little bit further out the curve, we are kind of neutral on the two-stands curve.
The curve, as of now, exhibits a strong negative directionality versus yields, so that is basically a bull steepening, bear flattening dynamic. But we are learning from the dynamics observed on the Euro curve, where the directionality has shifted from this negative to the Euro curve now being driven by the intermediate sector, so bear steepening, bull flattening dynamic. If our view of just one more cut from the risk bank is realized, then the Stiber curve directionality will shift in the coming weeks, where the front-end tension will get anchored.
So on the curve, we are staying very cautious. Okay, thanks. So if we shift to Norway, the 25 basis point ease from Norge Bank back in June was definitely a surprise.
Do you now expect them to be cutting further as we go through the second half of this year, and is that priced into Norwegian rate markets? Yes, that June cut was definitely a surprise, as market was pricing close to zero basis point going into the meeting. Now, we are pricing close to zero basis point for the August meeting in two weeks' time, but I don't think they will surprise again at the next meeting, given that it will completely erode their credibility of any kind of forward guidance.
But I do expect them to cut twice more this year, which is in line with their own forecast. We expect a 25 basis point cut both in September and December, and then another cut in March next year, which in our view will be the final cut, so this pause at 3.50. The Nibor curve is pricing around 50 basis point for this year, but then it tails off with the terminal rate priced around 3.35 by next year-end.
We keep a medium-term bullish bias nevertheless, even though our pricing for our expectation of terminal is slightly higher than what is currently priced in. We believe that there are downside risks due on continued medium-term risk coming from the weakening labor market, lower oil prices, and tariff-related impact, both globally and domestically. So not very high conviction of views in Norway at the moment on the Nibor curve, but both outright or cross-market basis.
Okay, thanks for that, and that's all from us. Thank you for listening and stay tuned for more updates on fixed income space here on At Any Rate, JPMorgan's global research podcast series. This communication is provided for information purposes only.
Please read the JPMorgan research reports related to its content for more information, including important disclosures. Copyright 2025, JPMorgan Tracing Co., all rights reserved. This episode was recorded on 8th August 2025.