Bank of England Preview – Christmas Pause in Cutting Cycle

• We expect the Bank of England (BoE) to keep the Bank Rate unchanged at 4.75% on Thursday 19 December in line with consensus and market pricing.
• Data has broadly been in line with the BoE’s expectations, warranting a continued signalling of only a gradual approach to monetary policy easing.
• We expect the reaction in EUR/GBP to be rather muted with risks tilted to the topside.

We expect the Bank of England (BoE) to keep the Bank Rate unchanged at 4.75% on Thursday 19 December in line with consensus and market pricing. We expect the vote split to be 8-1 with the majority voting for an unchanged decision and Dhingra voting for a 25bp cut. Note, this meeting will not include updated projections nor a press conference following the release of the statement.

Since the last monetary policy decision in November, data has broadly been in line with the MPCs November forecasts. Headline inflation has been slightly stronger than expected but importantly service inflation was in line with expectations. Similarly, private sector wage growth matched expectations printing at 4.8% y/y in the three months to September but with more apparent loosening evident in the labour market. While the disinflationary process is broadly on track, topside risks are evident in the latest PMI surveys only further amplified by the expansionary fiscal stance. Growth has been slightly weaker than expected in Q3 and with downside risks to the Q4 growth outlook. We note that we will receive a string of key data releases just ahead of the meeting on Thursday. The labour market report for October/November is published on Tuesday 17 December and November inflation data the day prior to the meeting on Wednesday 18 December. While we do not expect the incoming data this week to move the needle for the December meeting it will likely prove pivotal in terms of the monetary policy outlook in 2025.

BoE call. In 2025, we expect cuts at every meeting starting in February and until H2 2025 where we pencil in a slow-down in the easing pace to only quarterly cuts. This leaves the Bank Rate at 3.25% by YE 2025, which is lower than markets are expecting. We do however see the risk of the only gradual approach continuing in Q1 with a pause at the March meeting. Until data sufficiently warrants it, we think the BoE will be on steady course pausing at the meeting this week with service inflation and wage growth still elevated.

FX. We expect the market reaction to be rather muted upon announcement, barring any notable surprise in CPI on Wednesday altering the guidance. On balance, we tilt towards a dovish twist, which does suggest some slight EUR/GBP topside following the release of the statement. More broadly, we expect EUR/GBP to move lower in the coming quarters driven by BoE lagging peers in an easing cycle for the time being, UK economic outperformance and tight credit spreads. The key risk is more forceful policy easing from the BoE.