Responding to the Bank of England decision earlier today, John Wyn-Evans, Head of Market Analysis, Rathbones, one of the UK’s leading wealth and asset management groups, provides insight.
“Recent poor GDP and employment data had already strengthened the hand of the MPC’s ‘doves’ ahead of today’s meeting, while this week’s lower-than-expected headline inflation rate raised the possibility of a softer stance from the ‘hawks’.
In the event, the 0.25% cut was duly delivered, but with that 5-4 split again, as Governor Bailey sided, this time, with the doves. The accompanying commentary from the meeting minutes reflected that balance, although it continues to point to more cuts to come in 2026, with rates being ‘on a gradual downward path’. The MPC appears keen not to be seen to be taking risks with inflation, especially when many staple household goods and items of food remain much more expensive than they were in the not too distant past.
There was a reference to finding the ‘neutral rate’, the interest rate at which inflation is neither rising nor falling, but, as we often observe, this is a rate that can often only be located by going past it owing to the lags in data and the transmission of monetary policy into the economy. All things considered, though, and this being the sixth quarter-point rate cut of the current cycle, we are likely much closer to the end than the beginning of the cycle, barring some nasty economic accident.
Encouragingly, two of the more hawkish voters, Catherine Mann and Megan Greene, did acknowledge that they had moved closer to seeing the case of cutting rates, but everything will remain data-dependent. Balancing that, three of those who opted to cut said that they will want to keep an eye on employment trends and wage growth before casting their next votes.
While the rate cut is undoubtedly good news for borrowers, it seems insufficient to boost the economy substantially. Confidence remains low and the recent Budget failed to introduce measures that could be considered friendly to growth while increasing taxes by £26bn. The domestic political outlook remains uncertain heading into 2026, with May’s local elections providing the next big test for the Prime Minister.
Market reaction was relatively subdued, although a slight rise in the value of the pound reflected the fact that the overall tone of comments implied that the base rate will not be cut again any sooner than previously expected. By the same token, Gilt yields rose a few basis points to reflect the shallow path of cuts from here. A firmer pound tends to weigh on the FTSE 100 index owing to its high exposure to earnings from overseas, and the index is unchanged and slightly underperforming other markets today. Mid and small-cap indices are equally unmoved despite their higher domestic exposure as there is some disappointment that more cuts do not seem to be coming sooner.”
