Looking ahead to BoE Thursday
On Thursday the Bank of England will publish its second monetary policy decision of 2025. Casting our minds back momentarily to its last publication in February, we are reminded of the surprising shift in narrative from key MPC members. The shift in voting patterns saw one member, previously viewed by the market as hawkish having favoured prompt rate hikes, call for a 50-basis point cut at the February meeting. Sterling wasn’t overly impacted by this event in the longer run and GBP was still able to recover ground from the receding US Dollar.
The path of short end UK rates couldn’t be more important at this time. As Rachel Reeves prepares to deliver her spring budget, the cost of borrowing is critical to deciding which public spending and tax revenue decisions the Chancellor can afford. There is no rate cut expected from Thursday’s decision. However, as it did in February, the bank could still create some surprises based upon its voting pattern and decision’s precise wording. Since the February decision, cable has rallied and now stands on the cusp of 1.30. Much of that rally has been driven by US dollar weakness, however the change in price level could leave Sterling vulnerable to a more dovish decision.
Thanks to the change in the tax burden for employers, the UK labour market has been in focus for the MPC. So far redundancies haven’t shown a significant deterioration in the labour market. In fact, wage growth continues to outpace the level of which the Bank of England would like to see it. Ultimately, thanks to stubborn wage and services price inflation, Thursday’s decision is less likely to create significant headaches for Sterling. Where there does remain significant room for adjustment is in the longer dated portion of the UK’s yield curve where we observe a stubbornly high terminal rate. A deterioration of yields in this portion of the curve is likely and arguably necessary, but it could also entail a deterioration in GBP.
Discussion and Analysis by Charles Porter
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