BoE Review: Dovish Hold Sets the Stage for a December Cut
- Macro view: The BoE left rates unchanged at 4.00% in what was ultimately a dovish hold, as expected. There were four dissenting votes for a cut and an acknowledgement that inflation is likely on a downward trajectory. Governor Bailey remains the key in a divided MPC. He seems close to joining the doves but sees high option value in waiting for the next meeting in December when there will be more information on inflation and the UK’s fiscal policy. Absent any distortive policies at the Budget, we think that inflation figures broadly in line with the BoE’s projections (rather than an undershoot) would be sufficient for Bailey, and hence the MPC, to vote for a cut in December. We then see two further cuts in 2026.
- Markets view: Dovish policy communication alongside the decision to leave rates on hold has put additional downward pressure on short-term UK rates and the GBP. We expect GBP weakness to extend further against the EUR heading into year-end if slower inflation is confirmed in October and November. The UK government is expected to announce a significant package of fiscal tightening measures in the Autumn Statement creating more room for the BoE to lower rates further next year.
Macro view: The door is wide open for more easing before year-end
Bailey the key – and he sees high option value in waiting until December
The BoE left rates unchanged at 4.00% and marked an end to the quarterly pace of easing that had been established since August 2024. It was ultimately a dovish hold, in line with our expectations (see preview here). This meeting saw an overhaul in the way the BoE communicates its decisions – but ultimately the story remains the same. Inflation has probably peaked, but it makes sense to wait for more confirmation before easing policy again. We maintain our view that the BoE will cut in December and then twice more next year to 3.25%.
The details were generally supportive of that view. The BoE’s guidance was relaxed slightly with the requirement for “careful” easing dropped from the wording. The near-term inflation projections were revised lower with the headline rate seen at 3.0% in January. The BoE’s Q3 GDP growth projection was also revised down from 0.4% to 0.2%, in line with our expectations.
The vote split (5-4) was narrower than we anticipated with Breeden joining the dovish camp and voting for a cut (the first time she has dissented in her 17 meetings). But in a divided MPC, governor Bailey is still the key swing voter. He indicated that, while the BoE expects the peak in inflation has been reached, he sees a high option value in waiting until the next meeting in December. Between now and then, he said that the BoE will “get more data on inflation and cost pressures in the economy” and “will be able to analyse how this year’s Budget might affect the economy and the outlook for inflation”.
This meeting also saw the introduction of individual comments from each MPC member in the minutes. These provided a good degree of detail and colour and allowed for sentiment analysis of the text (see chart below). Breeden explained that she has “greater confidence that the disinflation process remains on track”. On the other side, Lombardelli seemed more hawkish than we would have expected. She gave little indication of a preference for further easing and indeed a suggestion that reversing a policy mistake after doing so would be costly for the BoE’s credibility. Meanwhile, chief economist Pill’s words came across as less hawkish than may have been expected, probably reflecting easing concerns around food inflation after the latest CPI release.
But it’s clear that Bailey’s view is key in a divided MPC. It seems that he is close to siding with the doves and voting for a cut. He said that upside risks to inflation “have become less pressing” and that he sees “further policy easing to come if disinflation becomes more clearly established”. Bailey also stated that the BoE’s new forward-looking Taylor rule-implied path for rates is a “fair description” of his position at present. That sees rates falling to 3.6% in Q1 2026 and then 3.3% (i.e. almost three full cuts) by Q4.
The BoE has revised down its near-term CPI projection
Bailey seems close to siding with the doves
Chart is based on textual sentiment analysis of individual MPC members’ commentary in the BoE’s minutes of the November 2025 meeting. Source: Bank of England, MUFG GMR
Between now and the next meeting there will be two inflation releases, as well as the Budget. The onus will be mostly on the data to show that the peak in inflation has indeed passed. The BoE is projecting headline inflation to ease from 3.8% (where it has been for three consecutive months) to 3.4% in November. Our take from Bailey’s comments today is that an inflation outturn in line with those projections would be sufficient for him to vote for a cut (that is, it wouldn’t take an undershoot).
On fiscal policy, we think that the Budget will most likely be perceived as dovish. The chancellor has been determined to make the right noises to market participants. In her speech this week she highlighted the “ironclad” commitment to the fiscal rules, talked about “getting inflation falling” and “creating the conditions for interest rate cuts”. The BoE will remain especially wary of distortive/inflationary measures after policy decisions, such as the rise in employer NICs contributed this year’s rise in UK inflation, but, as we have noted before, Reeves seems to have learnt a lesson there. There is some suggestion that household energy bills could be reduced, possibly through a VAT cut. The government’s decision on the minimum wage will also be an area of particular focus for the BoE. There have been suggestions that last year’s 6.7% increase will be followed by a more tolerable rise of ~4% next year. With the broad picture set to be one of fiscal consolidation, it seems likely to our minds that the Budget will open the door even further to a December cut.
Bottom line: The BoE presented a range of new information but there was nothing to change our view that the next cut will be in December before two more moves in 2026.
BoE MPC – summary of recent votes
Markets view: GBP weakens as BoE signals further cuts on way
BoE update supports recent weakening trend for GBP
The pound has initially weakened following today’s BoE policy update. It is helping to keep EUR/GBP trading above the 0.8800-level where it has been attempting to break above over the past week. In contrast, the GBP has held on to recent gains against the USD after cable failed to break below the 1.3000. The pound sell-off reflects the dovish communication which accompanied today’s decision to leave rates on hold. The main dovish signals were: i) the close 5-4 vote to leave rates on hold, and ii) the views of Governor Bailey which indicated he was close to voting for a rate cut but wanted to wait for more evidence to see “if the durability in disinflation is confirmed”. Two more CPI reports for October and November will have been released by the next MPC meeting on 18th December. Additionally, the BoE will have the final details of the UK government’s fiscal plans from the Autumn Statement. As a key swing voter Governor Bailey’s comments indicated he is likely to support another rate cut as soon as next month as long as there is not a significant upside inflation surprise, which should then be sufficient to tip the majority on the MPC in favour of a rate cut.
In the UK rate market, pricing for a December rate cut has increased a little. There are currently around 17bps of cuts priced in compared to around 16bps as of yesterday highlighting that market participants remain reluctant to more fully price in a December cut until there is confirmation that softer inflation evident in September has been sustained. Additionally, the UK rate market has moved to price in more active BoE easing for next year. The implied yield on the December 2026 SOFR futures contract has declined by around 3bps. In the accompanying press conference, Governor Bailey indicated that he thought the “market curve showed a sensible path” for the policy rate. We continue to believe that there is room for short-term UK yields to adjust lower as the market moves closer to our forecast for the BoE to lower the policy rate to a low of 3.25% next year. The decline in short-term yields should continue to support our forecast for the GBP to weaken further against the EUR (click here). On the other hand, levels closer to 1.3000 provide more attractive levels to buy the GBP against the USD. We remain unconvinced that the USD’s rebound will be sustained.
The next challenge for the UK government and the GBP will be the upcoming Autumn Statement later this month. The government’s plans to tighten fiscal policy are supportive for restoring investor confidence in the UK public finances and gilt market, but will also prove politically unpopular. The big test for the Labour party’s popularity will come next year when the local elections are held in May. A bad showing for the Labour party would increase the risk of a leadership challenge against Prime Minister Starmer. Pricing in a higher domestic political risk premium into the GBP would add to downside risks for next year alongside further BoE easing.
DOVISH REPRICING OF BOE CUT EXPECTATONS HAVE WEIGHED ON GBP
Source: Bloomberg, Macrobond & MUFG GMR