The Bank of England surprised investors by taking a more dovish stance than many had expected, voting 5-4 to leave interest rates unchanged. The narrow margin underlined a split in policymaker views while signaling a softer tone in communication.
Following the announcement, market pricing shifted modestly to favour a potential rate cut in March. However, the prevailing market consensus remains stronger for an easing move in the second quarter, when data showing firmer evidence of lower inflation is expected to be more apparent. ING has expressed a preference for a March cut.
Even with the Bank’s dovish messaging, markets are reluctant to fully reflect two 25 basis point cuts this year. Political considerations are cited as a key reason for this caution. The possibility of a leadership challenge to Prime Minister Keir Starmer and an associated move leftward in government policy is seen as a risk that could make the UK government bond market vulnerable and might delay the central bank’s easing cycle.
That caution was visible in the gilt market: 30-year UK Gilt yields closed higher on Thursday despite the Bank of England’s dovish stance. The rise in long-dated yields indicates investors are weighing political and other risks alongside central bank guidance.
Currency markets are also responding. ING analyst Chris Turner suggests the British pound could come under pressure from these developments. ING expects EUR/GBP to find support in the 0.8670 to 0.8680 area. Over the next month, ING’s bias points toward 0.88 for EUR/GBP as political pressure persists on Prime Minister Keir Starmer and incoming economic data gradually strengthens the case for a March rate cut.
The interplay between central bank communication, political uncertainty and market pricing is shaping outcomes across the gilt and currency markets. For now, markets have acknowledged a more dovish Bank of England but remain cautious about fully pricing in the scale and timing of potential rate cuts.