New Trade: Long SFIZ6, BoE to Skip June, but Still Expect August Cut Acceleration

Summary

• The BoE cut 25bp as expected. Pill’s backing for a pause was an unexpectedly hawkish surprise.
• So too was Bailey’s comment that the decision among centrists was a coinflip until the tariff announcement.
• We retain our central case that they skip cutting in June but will have the evidence needed to accelerate cuts from August.
• A risk is the BoE remaining wedded to flawed ONS data (they are somewhat confused on this).
• We think the terminal rate is priced too high by the market.

Market Implications

• New trade: We go long SFIZ6 in our model portfolio at 96.5 targeting 97.0, with a stop at 96.25.
• We remain bullish UK real rates and are long 10Y linkers in our model portfolio (target: 0.2%).

Skip June – Accelerate in August

The BoE cut rates by 25bp as expected and made net-dovish tweaks in the forecasts and the commentary. We had expected two votes for a 50bp cut (Dhingra and Taylor), and they duly delivered. However, Pill’s vote for no cut was a surprise. Mann also voted for no cut, but we put little weight on her vote, which was probably driven by the recent rally in STIR.

On the dovish side were the tweaks to the forecasts, and an adjustment to comments on the labour market (from ‘in balance’ to vacancy/unemployment ratio being ‘below equilibrium’). The MPR base case is for economic slack to continue widening despite rebounding consumption, following productivity gains.

On the hawkish side were comments in the minutes suggesting prior to US tariff announcements most members who backed a 25bp cut had seen the decision as ‘finely balanced.’ This suggests the BoE are not on an automatic quarterly (MPR) cutting path.

Our base case remains unchanged. The BoE will skip June, but data will force them to accelerate cuts from August, and ultimately at the very least they will need to cut to 3.5% by year-end (Table 1).

The market rightly viewed the meeting as hawkish, given the voter pattern and pared pricing of cuts in 2025 to 57bp (our base case is 75bp). It now looks attractive to go long here.

We noted pre-meeting the terminal rate was far too high, it has since risen near 3.5% in December 2026, or just three more cuts in the next 18 months.

On this basis, we now enter a long SFIZ6 at 96.5, targeting a rally to 97.0, with a stop at 96.25.

We remain long 10Y linkers in our model portfolio targeting 0.2%. It has sold off since initiation, providing an attractive entry point.

MPC’S Confused Tone Raises Risks

Overall, the BoE seemingly see recent outlooks largely in line with February MPR’s (with small tweaks). This means lower inflation and a continued loosening labour market, with increasing slack.

Yet this stands in contrast to their statement that the centrist voters’ decision had been a coinflip until the tariff announcement.

Labour market comments were similarly confused. The statement noted the vacancy/unemployment rate was below equilibrium. However, hawks referenced the ‘more resilient’ than expected labour market, suggesting they focused on LFS unemployment rate rather than the more accurate PAYE data that suggests a shrinking workforce.

Given consistent issues with ONS data, the risk is that the BoE ties its decisions ahead to flawed labour market data and hence fails to ease fast enough this year. This adds to our conviction that SFIZ6 is the better place to go long.

Forecasts Moderately More Dovish

In the labour market, the unemployment profile was revised up, while the wage growth numbers were revised down (Charts 2 and 3). Nevertheless, employment growth still appears high, especially compared to the actual PAYE data (Chart 4).

They referred to the net additional desired hours (caveating that it, too, comes from the flawed LFS data, Chart 5). This has correlated closely with the unemployment rate pre-COVID, and has increasingly dislocated higher since early 2023, when LFS data became far more volatile (and less believable).

Inflation has been revised lower in core and headline across the back end of the profile, with headline inflation now stable at 2% from mid-2027 and core from Q1-2027 (rather than both Q1-2028 as previously). Near-term core inflation has been revised up in H2 2025 but falls rapidly back thereafter (Chart 6).

GDP was revised up for Q1 (in line with the monthly data beat), but down further out (leaving it net slightly larger at the end of the profile than in February).

MPC Scenarios Self-Evident

The touted scenario analysis was self-evident – weaker demand lowers inflation across their forecast (by 0.3ppt), and weaker supply raises it (by 0.4ppt).

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