BoE pauses, but the fight against inflation continues

Highlights: The Bank of England (BoE) voted 6-3 to keep Bank Rate unchanged at 3.75 per cent, highlighting that while policymakers are comfortable leaving rates unchanged for now, they are far from declaring victory over inflation. Domestic price pressures continue to ease, and the labour market is gradually cooling, but renewed geopolitical tensions and higher oil and gas prices have shifted the focus back to upside inflation risks, increasing the likelihood that rates will remain restrictive for longer. Markets interpreted the decision as a pause rather than the end of the tightening cycle, with strong demand for UK gilts reflecting expectations that policy will stay tight while inflation risks remain elevated. Against this backdrop, we remain neutral on UK equities given domestic growth and political challenges, while continuing to favour longer-duration bonds as yields become more attractive and remaining constructive on index-linked gilts as protection against persistent energy-driven inflation.

• The BoE has chosen to pause, but not because inflation concerns have disappeared. While domestic price pressures are easing, policymakers remain cautious that higher energy prices could slow the disinflation process and keep inflation above target for longer. The focus has shifted from today’s inflation data to tomorrow’s inflation risks. Geopolitical tensions and the recent rebound in oil and gas prices have become the key uncertainties, with the BoE making it clear that policy will remain data-dependent if these shocks begin feeding into wages and broader prices
• The UK economy continues to show resilience, although momentum is softening. The labour market is gradually cooling rather than deteriorating sharply, wage growth has moderated, and inflation is moving in the right direction, even as younger workers continue to face a more challenging employment backdrop
• Markets have interpreted the decision as a pause rather than the end of the tightening cycle. Gilt demand strengthened after the meeting, reflecting expectations that rates are likely to stay restrictive for some time, while any renewed rise in energy prices could still reopen the door to further policy tightening
• Portfolio implications: We remain neutral on UK equities given the challenging domestic backdrop and ongoing fiscal uncertainty. The deteriorating growth and fiscal picture in the UK – driven by political uncertainties alongside inflationary pressures linked to the ongoing closure of the Strait of Hormuz could remain a headwind for gilts. Elevated volatility may persist in the near term, but longer duration bonds increasingly offer attractive income opportunities if growth slows further and inflation pressures moderate. We also remain constructive on inflation-linked exposure as a hedge against continued energy-driven price risks