Trading the BoE – TDS

TDS expects the MPC to cut Bank Rate by 25bps with a 7-2 majority, and leave guidance relatively unchanged, implying a cautious approach to further cuts. The MPC's treatment of the recent budget will have important consequences for the market's interpretation of future policy moves. A BoE cut is well priced in and is unlikely to be a big driver of the GBP. Markets are likely to keep digesting the results of US elections, TDS’ analysts note.

Three scenarios to consider

“Hawkish (20%, +10bp, +15bp, +0.40%). The MPC takes the OBR's estimates of the budget impact at face value, and boosts inflation and growth more than we expect. It cuts rates, leaves guidance unchanged, but the size of the upgrades to growth and inflation over the forecast horizon suggest a slower pace of rate cuts.”

“Base Case (70%, -6bp, -8bp, -0.10%). The MPC cuts rates in a 7-2 vote and maintains its cautious guidance that cuts are likely to continue, but without any clear signal for timing, leaving a December pause firmly on the table. Projections incorporate less inflation-worrying impact from the recent budget, with softer inflation in Year 1, and broadly unchanged projections elsewhere. Year 2 and Year 3 inflation remain below the 2% target.”

“Dovish (10%, -10bp, -15bp, -0.50%). The MPC cuts rates in a more definitive 8-1 or 9-0 vote, and points to the rapid recent decline in inflation as a reason to be prepared for more cuts ahead. While there's no explicit signal of a December cut, the tone opens the door wide open to a cut then, and at subsequent meetings.”