BoE React: Room for Faster Cutting Ahead

Summary

• The BoE cut 25bp last week as expected. The MPR forecasts and tone of comments were largely in line with our base-case expectation.
• Inflation was revised down near-term, but revised up in the long-term too, albeit with the positive skew removed as per our base-case.
• Headline and core CPI profiles to year-end seem reasonable, but the services profile looks a bit hawkish despite the downward revision.
• The unemployment rate is a big unknown given the poor quality LFS data. The downward shift in the MPR forecast lowers the bar for an upside surprise, but it is hard to be confident either way.
• Private regular wage growth forecasts being left as-is sets a low bar for a miss in the near-term.
• GDP growth was revised down as expected near-term, in line with the probable slowdown in Q3 data Further out, growth was lifted in 2025, but dropped in 2026 & 2027. Overall, this profile may be too dovish.
• The tone of BoE comments around the budget was in line with our expectation, stressing the uncertainty of the effect, and not expecting it to change path of policy in the near-term.

Market Implications

• In line with our base case scenario, this is a relatively dovish outcome, and opens the way to more dovish BoE pricing.
• We continue to see value in receiving 10Y GBP and paying 10Y EUR.

BoE Looking Through Budget

The BoE cut rates by 25bp with a vote split of 8:1, a stronger consensus than I had expected.

I set out a series of scenarios of how the November MPR might pan out. I revisit this table now we have the result (Table 1). In short, the outcome predominantly aligned with my base-case, with some parts more hawkish and some more dovish (I would not put too much weight on the vote pattern).

Interestingly, the elements that tended to be more hawkish vs my expectation in the November MPR were the labour market data (especially near-term). This is important as we will quickly see whether this is valid or not.

My feel pre-Budget was the BoE can cut in November and December. The budget then reduced my expectation for a December cut, but this BoE meeting has kept alive the possibility as:

• The BoE sits comparatively hawkish on near-term labour market data providing room for an undershoot before the December meeting.
• According to Bailey if they continue to see more progress on disinflation than expected, it will justify faster cuts.
• Bailey and Lombardelli’s comments around the budget were relatively dovish. They stressed high uncertainty and the need to watch the data (as expected), but that even with the budget-driven inflation rise, CPI returns to target by end-horizon.
• The BoE spoke explicitly about the fact that forecasts were predicated on a profile for bank rate much more dovish than currently priced (Chart 1). Implicit is that they expect given current conditions to cut rates more than now priced.

We look in more detail below.

Inflation

In line with our base case, inflation was revised up near-term, and revised up in the long-term too, but with the positive skew removed. Headline: peak moved later, with a lower near-term spike. Core: revised up over full profile. Services: revised down over monthly profile, but flat thereafter – at roughly the same YoY rate in 6 months as now.

Macro Hive View

The headline and core profiles to the end of the year seem reasonable, but the services profile remains relatively hawkish near-term despite the downward revision.

Labour Market

The unemployment rate has been revised down as expected on the recent undershoots in the LFS unemployment numbers. Private regular pay growth’s profile near-term is largely unchanged, with a tick-up expected in Q4 2024 before declining again.

Macro Hive View

The unemployment rate is a big unknown given the poor quality LFS data. Revising it down lowers the bar marginally for an upside surprise, but it is hard to be confident either way. Private regular wage growth forecasts being left as-is sets a low bar for a miss int the end of the year.

Growth

GDP growth was revised down as expected near-term, in line with the likely slowdown in Q3 data. Nevertheless, this is predominantly seen as a downgrade in government and housing investment effect, while consumption’s growth in Q3 is left unchanged.

The pattern for growth further out was shifted, with an upward revision in 2025, but downward one in 2026 and 2027 (Chart 6). Their expectation is based on more forward-looking households meaning that the GDP boost from fiscal expansion fades faster than usual.

Macro Hive View

Over the entire horizon, GDP growth is left unchanged from August. This is partly a reflection of higher bank rate assumption but seems quite a strong assumption given the scale of the fiscal easing.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)