BoE will maintain “a gradual and careful approach” after today’s dovish vote

As widely expected, the BoE reduced its Bank Rate by 25bp to 4.5% at today’s MPC meeting , i n line with our expectations . A ll MPC members voted in favor of lowering the policy rate, yet there were two policy members advocating a cut of a larger magnitude ( 50bp ) . For the months to come, the MPC continues to maintain “a gradual and careful approach to the further withdrawal of monetary policy restraint”. Two policy members vot ing in favor of a 50bp cut point s , we think, to a dovish tilt , especially as one of the two , Catherine Mann, was seen as a most hawkish rate setter . The MPC warned that households face d pressures from higher inflation and sluggish growth this year. The BoE downgrad e d its growth projections for 2025 given that GDP g r owth in the second half of last year was sluggish and less tha n anticipated in November. In Q3 2024, the UK economy stagnated , while the BoE expects the economy to have contrac ted by 0.1% in the final quarter of 2024 . At the same time, t he BoE revised its inflation forecasts higher throughout the forecast horizon. The BoE now sees headline CPI inflation peaking at 3.7% in Q3, almost a f u ll percentage point more than previous BoE’s projections of 2.8% . Financial markets have increased their bets on further rate cuts this year following today’s decision, converging closer to our main scenario . We continue to expect three more 25bp rate reduction s this year. We think that a more cautious growth outlook will necessitate a more dovish policy path ahead especially as a pick-up in inflation will be temporary this year. Today’s dovish vote split adds support to our scenario. Yet, as Bailey reiterated while he was expecting further cuts , he also stressed that “the word gradual and the word careful can very much apply”. So, a meeting by a meeting approach will be pursued, giving support to our view that the BoE will cut only at every second meeting this year to better assess and balance economic weakness with inflation stickiness.