BoE Preview: rate cut expected, but pace of easing remains uncertain

The Bank of England (BoE) is widely expected to deliver a rate cut at its upcoming meeting, as policymakers balance weak domestic growth with the inflationary risks stemming from global trade tensions. At its March meeting, the Monetary Policy Committee (MPC) voted 8-1 to keep the Bank Rate at 4.5%, with only external member Swati Dhingra advocating for a 25-basis-point cut.

At that time, persistently high inflation was a key factor in maintaining the current rate. Headline CPI had climbed back to 3% in January, and the BoE projects it could rise further to 3.75% by summer. Geopolitical uncertainty and renewed U.S. tariff threats have also prompted a cautious stance, even as domestic data shows lacklustre growth and hiring plans, while wage pressures in services remain elevated.

Governor Andrew Bailey reiterated the need for prudence, noting that while easing is on the table, it must be guided by “accumulating evidence that price pressures are easing,” and emphasizing that there is “no presumption about cuts at the next few meetings.”

Economic Backdrop: Mixed Signals

The latest data indicates a modest rebound in economic activity. February 2025 saw UK GDP increase by 0.5% month-over-month, with growth broad-based across services, production, and construction. This helped lift overall output by 0.6% over the December–February quarter. Revised figures also show that the economy expanded by 1.5% on a quarterly basis, marking a notable recovery from earlier weakness.

However, sentiment among households has deteriorated. The GfK Consumer Confidence Barometer fell four points to –23 in April, its lowest level since November 2023, reflecting growing pessimism about the economic outlook. Together, these trends suggest an economy that is growing, but increasingly constrained by external shocks, rising household costs, and real-income pressure.

Market Focus: Clarity on Policy Path

As it stands, the March meeting set a higher bar for a rapid follow-up cut, however the MPC will likely wait for confirmation from April’s CPI release (due 21 May) and additional evidence of wage disinflation before moving more aggressively. While the policy bias remains tilted toward easing—given weak growth and restrictive monetary conditions—rate-setters are expected to proceed more cautiously than markets had priced in earlier this year.

As always, market participants will scrutinize the accompanying policy statement and press conference for subtle shifts in tone. Two key phrases will be particularly important in shaping expectations:

1. “Gradual and limited” path

This phrase signals a slow and measured approach to rate cuts, with the terminal rate likely higher than pre-Covid levels. If retained, it implies a continued cautious stance—possibly one cut per quarter—suggesting Bank Rate may bottom near 3.75%. If the language is softened to “balanced” or “data-dependent,” it could be interpreted as a willingness to accelerate easing, likely weakening the pound and lowering gilt yields.

2. “Higher for longer risks”         

This expression indicates concern about persistent inflation, justifying a prolonged period of restrictive rates. Its retention would underscore a hawkish tone, potentially limiting sterling downside even if a cut is delivered. A softened tone—such as referring to inflation risks as “two-sided” or stating that risks have “eased”—would be read as a dovish pivot and could pressure the pound.

The post-decision press conference will be another key moment for markets, offering additional clarity on the direction of policy. Traders will parse every nuance for signs of a dovish or hawkish tilt.

Scenario Analysis: Three Potential Outcomes

1. Baseline (Neutral Tone):

If the MPC maintains both “gradual and limited” and “higher for longer” language and keeps quantitative tightening (QT) capped at £100 billion, markets are likely to view the decision as a steady, data-dependent path. Expect pricing for two more 25bp cuts this year.

2. Dovish Tilt:

Dropping the “gradual” qualifier, softening inflation warnings, and hinting at slower gilt sales would signal a stronger response to growth headwinds. Markets would likely anticipate a faster easing cycle, sending GBP lower and lifting short-term bond prices.

3. Hawkish Surprise:

If both phrases are retained and QT remains “on track,” the BoE could be signalling concern over lingering inflation pressures. This would likely delay expectations for the next cut until August, lifting the pound and pushing short-term yields higher.

GBP/USD Outlook: Watch for Volatility

Heading into the meeting GBP/USD is hovering around the 1.33 mark after being rejected at the 2024 high earlier last week. The bias remains positive however the pair had been toying with overbought levels for a while as the RSI kept on pushing higher. The reversal seems technical, but traders should watch out for the Federal Reserve meeting on Wednesday as it could increase volatility heading into the BoE meeting. A drop to 1.32 is still possible from here but the momentum should reject any further downside if the bias is to remain bullish going forward.

GBP/USD daily chart

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