Consensus unanimously expects the Bank of England to cut the Base Rate by 25bps to 4.25%, with markets also fully priced for this. Of greater interest will be how the MPC positions itself for rate cuts going forward. Money markets currently forecast around 94bps of policy easing in 2025 in total, so just under another three quarter-point moves in five meetings after tomorrow. With so much trade uncertainty and potential downside risks to growth and inflation, will the Old Lady turn more cautious and dovish in its guidance and quarterly updated projections?
The decision to cut rates is expected to be 9-0, however, some economists expect external member Dhingra to back a larger 50bps reduction. A rate move would be in-fitting with the MPC’s existing preferred pace of cutting at every other (and Monetary Policy Report) meeting. Policymakers are likely to stick to the “gradual and careful“ stance to removing policy restraint. However, if they drop the language around this, that will provide the MPC space to accelerate cuts if needed (to possibly consecutive meetings), and would be a dovish signal.
Inflation data is key, watch new forecasts
Headline inflation recently surprised to the downside with energy prices falling and moving lower since the February meeting. Â For the accompanying MPR, expectations are for a reduction in the 2025 inflation forecast, though there will likely be no major changes to the medium-term outlook. Services inflation in the UK remains particularly stubborn despite expectations that it is likely to decline. But wage growth has started to cool with the private sector figure printing below 6%.
There should be an upgrade to the 2025 growth forecast due to the better run of data seen in Q1. Retail sales point to improvement in private consumption but the impact from tariffs poses a downward risk, which could hit 2026 projections. Forward-looking PMIs have pointed to stagflation, which would be a big concern for the MPC.
Market reaction
Key for markets and GBP will be if Governor Bailey and the MPC hint at a quicker pace of rate cuts than the current quarterly pace. The labour market is gradually loosening, while price pressures stay elevated. They also have to add global trade policy tensions and domestic fiscal policy changes into the mix, with closer ties to the EU possibly on the horizon helping the growth outlook. A dovish twist could see cable test initial support around 1.3250, while EUR/GBP has steadied and could bounce off 0.85. On the flip side and similar to the Fed (though for different reasons), the MPC could be more mindful of price pressures over growth concerns, which would mean a hawkish cut.