BoE Preview: Too Soon to Accelerate Cuts?

Summary

• We expect the MPC to cut 25bp this week, with Dhingra and possibly Taylor backing a larger cut.
• Forecasts are likely to be more dovish on tariffs, low energy costs and undershooting wage growth.
• This and broader tariff uncertainty will add to a dovish tone in the statement – but we do not expect the BoE to telegraph an acceleration of cuts yet.
• Our base case is the BoE will not have enough data to justify an extra cut by June (they will by August), but they may justify one based on tariff risk alone.

Market Implications

• We remain bullish UK real rates and are long 10Y linkers in our model portfolio (target: 0.2%).
• We think the market is pricing the terminal rate too high (3.4%). We will enter long if the short-end sells off significantly on energy price/global tariff fears fading.

Too Soon to Flag Rate Cut Acceleration

We expect the BoE to cut 25bp this Thursday, in line with market consensus. Note: the release will be 2 minutes later than normal (12:02) to commemorate VE Day. Quarterly cuts seem the MPC’s agreed path and we expect unanimous backing for easing, with the majority voting for a 25bp cut and Dhingra (and possibly Taylor) probably backing a 50bp cut.

Our long-held base case is that the BoE shifts to cutting every meeting from August, with a tail risk of a June cut, to deliver at least another 100bp of easing this year.

Current market pricing is around 92bp of cuts to December. Oil prices have driven much of this. As such, we do not see great value being long the UK short end at these levels, despite our bearishness on the UK economy. We see the best value being long UK real rates. We are long 10Y linkers in our model portfolio targeting 0.2%. It has sold off 10bp since last Thursday, providing an attractive entry point.

We currently predict around a 25% chance of a June cut, but it will become much more likely if the MPC plays up the negative economic cost of tariffs, or if economic data greatly underperforms by then.

The latter is a tail risk given the MPC will not have a strong view on the post-April situation by then, and they will want clarity to accelerate the timetable (Table 1).

BoE Forecasts – Dovish Changes, High Uncertainty

Economic forecasts are likely to be more dovish, but they will probably stress high uncertainty given:

1. Trade war unknowns.
2. Low quality labour market data.
3. Unclear fallout from April one-offs (NIC and minimum wage rise).

More specifically, we expect:

The labour market outlook to probably become more dovish. Unemployment is slightly tighter than February’s MPR, but the data is low quality, actual PAYE employment is shrinking, and wage growth is undershooting (Chart 1 and 2).

Tariffs will put downward pressure on employment, but the MPC will probably retain comments that the labour market is in balance (although we disagree).

Inflation is likely to reduce near term on lower oil and gas prices and stronger GBP, but with lower market rates supporting the forecast further out (Chart 3). Tariff impact is unlikely to be strong given the uncertainty of its effect (see BoE comments below).

While services inflation is undershooting expectations, particularly in wage-intensive sectors, high uncertainty will remain until April’s one-off impacts are known.

GDP will be revised higher near term following recent beats, but suppressed further out by tariffs (Chart 5). We note that outside of government spending, GDP has not grown since 2019. A highly uncertain tariff situation is unlikely to support consumption, for which we remain bearish on growth.

BoE Tone Shifting More Dovish

Our BoE LLM index shows a gradual dovish shift since the start of the year, albeit with strong volatility into the end of March (Chart 1). This aligns with our view the UK will need a lot more monetary policy support given the economic outlook.

The BoE’s view on tariffs (see appendix for recent comments) is that they greatly raise uncertainty, lower growth, and have an unclear inflationary impact. As such, net/net (and given strong GBP), the tone is likely to be more dovish than at the last meeting.

Still Expect Accelerated Cuts From August

The market is pricing around 92bp cuts this year, largely aligning with our expectation for at least 100bp to be delivered (Chart 7). The pattern of pricing reflects cutting still centered around MPR dates (May, August, November), but with possible cuts priced for June and September (Chart 8).

We think the economy could deteriorate faster than the BoE expects. Our long-standing base case has been for an acceleration to cut every meeting from August, with risk of a June cut if the BoE is suitably worried about tariffs.

A sudden data deterioration pre-June remains a tail risk but given we will still only have April ONS labour market data by then, the picture may not be clear enough to justify an acceleration of cuts (see Table 1).

Overall, we expect the terminal rate to be below 3.4% – probably nearer 2.5%. The short-end rate has rallied well recently, and if the rally faded on an energy price rise, we would see good value in entering outright long UK short-end.

Appendix: Recent MPC Comments

• Greene (25 April): USD tends to rally post crises, so GBP strength may not last (and the disinflationary effect it has).
• Bailey (24 April): UK economy is not near to recession; high uncertainty could delay investment and raise the consumer savings rate. The UK economy could suffer even if it gets preferential tariff treatment from the White House.
• Pill (23 April): Quantitative easing was used as a sledgehammer, which is not the best way to do it. More surgical approaches are better.
• Greene (22 April): Tariffs could drive disinflation as cheap imports are diverted here.
• Greene (12 April): US tariffs will slow growth, inflation impact less clear due to currency moves.
• Breeden (10 April): Exchange rate outlook is key. A weaker GBP could fuel price pressures.
• Lombardelli (4 April): Tariffs will depress UK growth, inflation impact less clear.
• Dhingra (27 March): Stronger USD could drive inflation but be offset by cheap exporters selling to the UK.

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