The Bank of England delivered the expected Christmas cut, but the market reaction is anything but dovish. While the Bank Rate dropped to 3.75% from 4.00%, the pound is higher, driven by a deeply divided MPC and guidance that suggests the BoE is nearing the bottom.
Cable (GBP/USD) jumped roughly 35 pips following the release, trading to 1.3394 then fading to 1.3375 level. The 5-4 vote split wasn’t a surprise but Governor Bailey’s comments that further easing will be a “closer call” leaves the market pricing in about one-and-a-half cuts next year.
In the fixed-income space, the front end of the curve moved on the release and continues to grind higher. UK 2-year Gilt yields are up 5 basis points from pre-announcement levels, as the “hawkish” tone of the statement forced a repricing of the 2026 path. The market had been flirting with the idea of back-to-back cuts in Q1; however, with the BoE warning of a December inflation “hump” and “more limited space” for cuts, those bets are being scaled back.
Previously, a cut was fully priced for April but that’s now been pushed back to the June 18 meeting.
The FTSE 100 is edging lower, paring the gains it made yesterday in anticipation of the move.
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The sudden strength in Sterling is acting as a drag on the index’s heavy-weights who earn in USD.
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The Bank’s downward revision of Q4 GDP to 0.0% (from 0.3% in November) is weighing on sentiment.
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The prospect of lower rates—even if the path is slow—is clipping the wings of the big banks who have enjoyed high net interest margins.
As there is no press conference from Bailey today, the focus now shifts to the ECB rate decision at 1315 GMT. No ECB rate moves are expected.
This article was written by Adam Button at investinglive.com.