BOE policy decision in focus today

The rate cut today should not offer too much surprises as the OIS market is also signaling that traders have priced in ~92% odds of that. That will bring the bank rate to 4.50% as the BOE continues to gradually move to bring rates lower. The more important part in all of this will be the language and communique from the central bank.

The bank rate vote in December highlighted a decent split in views among BOE policymakers, with Dhingra, Ramsden, Taylor having voted to cut rates by 25 bps already then.

However, the BOE maintained that “a gradual approach to removing monetary policy restraint remains appropriate”. And that is still the key line to watch today, even as they do look to cut rates this time around.

There’s still much uncertainty to the inflation and economic outlook. As such, I wouldn’t expect the BOE to change up their communique.

The latest inflation report from December might have shown some easing price pressures. But it does come with a bit of a caveat as mentioned last month:

“The softer numbers largely came as services inflation fell but the details showed that it could have been due to a one-off from the ONS measurement. Patheon Economics’ Rob Wood pointed out that ONS had a cutoff date for 10 December this year for prices. And that led to a significant drop in airfares – coming well before the Christmas and New Year’s holiday period.”

Overall, the disinflation process is still bumpy and with core inflation still above 3%, it’s no time for the BOE to relax on their commitment.

As such, they will be delivering the rate cut today as expected but will continue to reaffirm that the next steps will follow a more data-driven approach still.

As things stand, traders are not seeing a back-to-back move for today and March. Instead, the next rate cut is priced in for May with ~83 bps of rate cuts priced in total currently for 2025.

This article was written by Justin Low at www.forexlive.com.