GBP: A modest dovish shift by the BoE

The Bank of England opted for a more dovish than expected communication yesterday. Despite keeping its guidance unchanged (rates to be restrictive for an extended period of time), the two most hawkish members changed their vote from a hike to a hold, and there was a mention in the minutes that rates can still be restrictive even with rate cuts.

All this isn’t hugely surprising, after all the real policy rate has continued to inch higher with inflation declining. Still, markets are largely reading this as an acknowledgement that cuts aren’t too far away, and now increasingly convinced the BoE will start easing in June (20bp priced in), along with starting to speculate on a May move (7bp priced in).

Our economics team has maintained its call for cuts to start in August, but June is not an unreasonable expectation. The softness in GBP is something that we had expected given we have long been more dovish than markets on the BoE, but might have come a bit earlier than what we have anticipated. EUR/GBP may struggle to find much more support above 0.8600 as UK data still has to validate the recent repricing of the Sonia curve.