BoE Preview: No Cut, But Voting Pattern Could Surprise

Summary

• We expect the BoE to leave the bank rate unchanged at 4.5%, with Dhingra, Taylor and Mann voting for another cut.
• We would be unsurprised if Mann backed another 50bp cut: our BoE LLM sentiment index supports her fear that transmission to financial conditions has weakened.
• The minutes will indicate whether this view has gained traction.
• Little has changed in the data since the last meeting to justify much change of tone from the MPC.
• We expect the BoE to cut 25bp in May, consistent with the quarterly cycle, before accelerating to a cut every meeting from August.

Market Implications

• We still expect the BoE to cut at least another 100bp this year.
• In our model portfolio, we remain long SFIZ5 and positioned for 2s10s gilt steepening.

Pause Now – Stay Dovish BoE

We expect the BoE will leave the bank rate unchanged at 4.5% this week. Without a presser or updated forecasts, information will be slim, but the minutes may reveal insightful discussion. We will watch for signs that lack of passthrough of easing is causing concern.

We expect little change in the statement:

• The GDP beat in January may be mentioned, but the tone likely remains pessimistic.
• Some reference to the recent inflation beat may be made, but as it came in food and rental prices, we expect they will continue to note domestic pressures moderating.
• We expect they retain ‘gradual and careful’, rather than replacing it with ‘cautious’, as some MPC hawks wanted.

The ‘gradual and careful’ tone is important. While the economy is flatlining, and in our opinion far more easing will be needed, the MPC are unlikely to see the urgency in cutting soon as:

1. They need to see the effects of one-off price rises (including water, travel and school fees) and whether they feed into longer-term price rises.
2. They need to see the price and labour market effect of fiscal policy, especially the employer NIC rise (hitting April), and any subsequent spending cuts (expect June).
3. There is still uncertainty within the MPC as to whether slow growth is supply (hawkish) or demand (dovish) driven.

We see it as highly likely that Dhingra and Mann back another cut (as the backers of 50bp in February). We also expect Taylor to back another cut given his past dovishness, despite recent comments highlighting uncertainty (all recent comments summarised in appendix).

We see a strong chance Mann backs a 50bp cut again, which could add a little volatility. However, we assign little weight to this until her take becomes more widespread within the MPC (watch the minutes).

Overall, we expect cuts to accelerate in August (or June if data collapses more suddenly). That is because that while we are in a demand driven slowdown with the labour market loosening faster than the MPC assumes the economic slowdown remains gradual.

This leaves us continuing to expect the BoE to cut at least another 100bp this year, and remaining long SFIZ5 and positioned for 2s10s gilt steepening, in our model portfolio.

Mann Disunited

Mann’s previous vote for a 50bp cut upset some members in the MPC. She justified it by pointing out the deteriorating economy and the risk of a non-linear deterioration ahead. She also highlighted the lack of loosening in financial conditions so far.

Her vote aimed to cut through the noise, arguing that the two 25bp cuts in 2024 had not appreciably loosened financial conditions. This was partly due to US rates dominating UK rates, and partly a consequence of the gradualist approach.

The transmission may be weakening. Our Macro Hive LLM measure of BoE sentiment (hawkish/dovish tone of recent speeches) shows that despite the BoE having become measurably more neutral/dovish since 2023, the five-year swap rate (which greatly affects the mortgage market) remains almost unchanged (Chart 1).

Given the above, and the fact that she views c.3.5% as the long-term average of bank rate, we see a large risk Mann votes for another 50bp cut.

Economic Situation – Recent Beats Will Justify Pause

Inflation ticked a little above MPR expectations in January, thanks to a rise in rent and food inflation. However, neither are likely to drive second-round price rises. Meanwhile, the services component undershot (Charts 2 and 3). Most of the Q1 one-offs (bus and train fares, water price, private education) are unlikely to impact business costs the way energy price rises did in 2022, too.

We expect the impact of the NIC rise to be limited by lower consumer demand, despite providing room for opportunistic profit shoring by firms.

We expect the BoE to see the economy as stagnating but not declining despite Q4 GDP data overshooting the February MPC estimate (Chart 4). We place a lesser weight on the January QoQ weight as it is based on volatile monthly data. This will be hawkish for the likes of Greene, who sees a widening output gap as necessary for capping inflation.

The labour market is a big unknown. Our take is that unemployment is slowly rising, but the LFS data is not very informative given recent volatility (Chart 5). We could see the rate tick down in the near-term simply on the pattern of recent oscillations.

Employment numbers from PAYE are more informative. We will be watching for signs of reduction. Growth there has stagnated recently, but was revised higher at the last outturn.

Mixed Pictures in the Surveys

Inflation expectations look relatively anchored, but they have ticked up recently (Chart 6). This should not concern he BoE too much as it is likely driven by the slew of one-offs, but they will watch closely for signs of longer-term dislocation.

Economic outlook surveys have diverged quite significantly (Chart 7). Manufacturing order book remains very subdued and falling. But the Lloyds Business Barometer has picked up. Consumer confidence sitting somewhere between, at subdued levels, does not suggest a positive picture.

Financial conditions remain tight. US markets continue to drive UK ones (albeit less than at the start of the year). This is important as if the gradual approach to BoE cutting does not get passed through it will mean greater need for ‘catch-up’ dovishness later.

Appendix – Recent Policymaker Comments

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