The Bank of England's decision to leave its policy rate at 3.75% has been read by UBS as a distinct move toward accommodation. The Monetary Policy Committee split 5-4, with four members favoring an immediate 25 basis point reduction, a division that UBS says was more dovish than markets had priced in.
UBS points to a material downward revision in the BoE's inflation path as a key driver of its reassessment. The central bank now projects inflation will reach 2.1% by the second quarter of 2026, a marked cut from the 2.9% outlook published in November.
While five policymakers preferred to wait for additional evidence on wages and prices before moving, UBS highlights that even typically hawkish members have shifted tone. The bank notes comments that indicate "wage and price moderation is in train," citing this as a signal that inflation pressures appear to be easing.
UBS's policy call and timing
UBS retains its forecast for a 25 basis point cut in March, which would lower the Bank Rate to 3.5%. The firm says the narrow vote and the BoE's revised inflation projections strengthen that view. UBS also expects the January inflation print, projected to show a significant fall to around 3% year-over-year, will provide enough justification for the committee to proceed with a cut.
Looking further ahead, UBS projects a second 25 basis point reduction in June, taking the rate to a terminal level of 3.25%. Governor Andrew Bailey described a terminal rate at that level as "reasonable" during the accompanying press conference. UBS also notes that analysts see risks skewed toward an even lower terminal rate than 3.25%.
Revised macro forecasts and market guidance
The Bank of England has brought forward the expected return of inflation to target by nearly a year, according to UBS's reading of the updated projections. At the same time, the BoE lowered its growth forecasts for 2026 and 2027 to 0.9% and 1.5% respectively, while nudging the 2028 projection up slightly to 1.9%.
On market strategy, UBS recommends receiving 5-year SONIA with a 3% target, noting that the 5-year rate currently stands at 3.72%. The bank interprets this position as evidence that neutral interest rates are likely below 3%, and that the case for stimulative policy is stronger than previously thought.
UBS's conclusion
UBS economists conclude that with inflation set to fall materially and signs of a weakening labour market emerging, the obstacles to more substantial rate cuts should decline over coming months. This combination underpins their outlook for monetary easing in the near term.