The BoE stays cautious, but the pathway to a December cut still exists

• The BoE held rates at 4.00% with a 7-2 vote split, in line with expectations. Guidance remained unchanged: the approach to future easing will remain cautious and data-dependent.
• The BoE also announced a slower pace of balance sheet reduction over the next 12 months, reducing the annual target from 100bn to 70bn. The maturity profile means that active sales will now increase. However, the BoE intends to skew sales away from long-dated gilts which feels like a compromise to avoid market disruption while avoiding any accusations of fiscal dominance.
• Nothing in today’s decision alters our outlook for rates. Recent data hasn’t produced any surprises and the bar for a November cut looks high after the finely balanced vote to cut in August. We continue to expect the next cut in December. The onus will be on the data and there will be plenty of it between the next two meetings, and we suspect that Budget speculation will increasingly weigh on sentiment and activity. Against that backdrop, skipping a cut in November and slowing the pace of easing might be a sufficient concession to some of the more hawkish MPC members. We then see gradual easing continuing in 2026 to a terminal rate of 3.25%.
• Today’s decision is in line with expectations and hence the limited market reaction. We believe today’s communication keeps open the prospect of a cut by year-end which is consistent with our weaker pound vs euro view.

Macro view

The BoE left rates unchanged and slowed the pace of QT

The BoE held rates unchanged at 4.00%, as expected. The vote was 7-2, in line with our expectations (see our preview here), with Taylor and Dhingra preferring another cut. The core guidance (“a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate” and monetary policy not being on a “pre-set path”) was left unchanged too. This is a central bank which wants to keep its options open.

The annual decision on the pace of QT was more interesting. The BoE decided to slow the pace of QT from 100bn to 70bn over the next 12 months, which is around the consensus. We expected a lower figure of 60bn. The maturity profile means that active sales will increase (to 21bn vs 13bn previously). However, the BoE announced it will skew sales away from longer-dated debt. The aim is “to sell fewer long maturity sector gilts than gilts at other maturities, such that approximately 40% of the MPC’s target would be met by selling short maturity sector bonds, 40% by medium maturity sector bonds, and 20% by long maturity sector bonds”. The logic is clear: the BoE seems wary of the volatile market environment at the longer-end of the curve, but wants to avoid accusations of fiscal dominance. We suspect that the chancellor would have hoped for a sharper reduction.

The period of ‘autopilot’ cuts is over – but we still expect more easing  

Looking ahead, nothing today changes our view about the outlook for interest rates. We still see scope for more easing, but at a slower pace. As Bailey said in his recent Treasury Select Committee appearance, “the path will continue to be downward” on rates, but “there is now considerably more doubt about exactly when and how quickly” future cuts can be carried out. While not ruling out a November move, that seemed like a clear indication that the well-established ‘autopilot’ path of quarterly cuts has ended following the finely balanced August decision.

The timing of any further moves will be dictated by the data. There was nothing game-changing in this week’s headline figures on inflation and the labour market, which were mostly in line with the consensus and the BoE’s August projections. Indeed, the BoE indicated today that these projections remain valid. There will only be one more set of inflation and labour market releases before the next policy meeting (6 November). The BoE expects that the headline inflation rate will increase from 3.8% to a peak of 4.0% and so it would take a hefty downside surprise to change the narrative. Meanwhile, there are still enough question marks around the reliability of official labour market data that officials would be minded to look past weaker-than-expected numbers in isolation. The bar for a November cut is high.

But a lot could change by December by which point the MPC will have a lot more information. There will be two further CPI and labour market reports between the meetings which are set to show both a renewal of the disinflation process and further increases in labour market slack. As the BoE puts it, pay growth is “expected to slow significantly over the rest of the year”. By year-end policymakers will also have a better steer on 2026 annual pay settlements, which are likely to look more consistent with the inflation target.

On top of that there will be plenty of survey and activity numbers (including October GDP) which we expect will be weighed down by speculation around the Budget (26 November). The BoE’s latest projection for Q3 growth (0.4% Q/Q) looks optimistic to our minds. In terms of actual fiscal policy changes, the extent of fiscal consolidation will be known by December. If reports that the OBR is poised to downgrade its productivity assumptions are accurate then the chancellor may be forced to implement more measures than expected.

All that said, we accept it’s a narrow path and a December cut could be scuppered, for example, by signs of further rises in inflation expectations. Any vote for further easing this year is likely to be finely balanced again. However, our view is essentially that the softer hawks on the MPC would consider a slower pace of easing (with a ‘skip’ at the next projection meeting in November) as an acceptable acknowledgement of their concerns, if data evolves broadly as we expect.

In terms of the broader outlook, we continue to think that gradual easing will continue into next year and see the terminal rate at 3.25%.

The BoE will slow the pace of balance sheet reduction

The labour market is loosening - and wage growth has further to fall 

Market implications

Today’s MPC announcement has come hot on the heels of the FOMC decision last night, which after a more balanced or less dovish communication resulted in some downward pressure on the pound versus the dollar. Some of that dollar gain reversed going into the MPC announcement and the knee jerk reaction was for some renewed modest selling of GBP/USD. But we don’t expect much conviction to trading following this meeting which as outlined above was largely as expected and didn’t contain any clear surprises.

Yesterday, market pricing meant that it was always going to be difficult for the FOMC to out-dove market pricing (hence the dollar rebound) and we would argue in a similar way but in the opposite direction it was always going to be difficult for the MPC to out-hawk market pricing. After the 5-4 vote to cut in August and following the flow of data, in particular inflation, market pricing for a November cut from the MPC had dropped to next to nothing ahead of this meeting – just 3bps. And there was only 7bps for a cut by year-end. Given the broad message from the MPC is similar to before, there remains a reasonable prospect of a cut this year. There is certainly no reason at this stage to remove the little pricing for a cut that there is and hence yields at the front-end of the curve are modestly lower. The 2-year Gilt is 3bps lower and the pound is a touch weaker on the day. The OIS curve has added about 1bp of easing for November and December which makes sense. Still, a small chance but a slightly bigger chance given the MPC today have left open the prospect of a cut by essentially maintaining the key elements of guidance as before (“a gradual and careful approach”).

The pace of reduction in QT (GBP 100bn to GBP 70bn) was around the consensus – we thought the figure might have been lower (we expected GBP 60bn) given Governor Bailey had stated Gilt market conditions would be a factor. But the higher level than we expected has been compensated by QT duration being shortened. Still, this may be adding to the underperformance in Gilts beyond the 2-year.

All in, we are maintaining our view of GBP underperformance going forward, in part predicated on the potential for a cut in December. We will have plenty of data between the last two MPC meetings and if the Fed is cutting as the labour market deteriorates the scope is there for a cut in December. A weak US dollar will help support GBP/USD but we expect the pound to weaken versus the euro as the rates market reprices a cut by year-end. Today’s MPC meeting doesn’t change our view on that.