BoE’s dovish hold as budget looms

Highlights: The Bank of England (BoE) struck a cautious tone at its November meeting, voting 5-4 to hold the Bank Rate at 4 per cent, with a narrow minority favouring a 25bps cut. The decision reflected a fine balance between subdued growth and lingering inflation pressures. We remain neutral across most UK assets, while seeing more downside risks to gilt yields.

• The Monetary Policy Committee acknowledged that CPI inflation has likely peaked, with the headline rate expected to ease to 3.2 per cent by March 2026 and gradually return to the 2 per cent target by mid-2027. Governor Bailey said the path ahead for monetary policy will depend on how the two opposing forces — cooling inflation and weaker growth — play out in the coming quarters
• The economic momentum remains subdued. The Bank estimates that the underlying GDP grew just 0.1 per cent in Q3, with exports and household consumption both remaining soft. A weak external backdrop and lingering uncertainty are holding back investment, while the labour market continues to loosen, helping contain wage pressures that had been a key driver of domestic inflation
• With productivity growth overall flat over the past five years, and the fiscal deficit forecasted at 4.4 per cent this year, investors have questioned the fiscal sustainability of the UK. To meet the fiscal rules and restore investor confidence in the gilt market, which is crucial for reining in yields and lowering the interest burden for the Treasury, Chancellor Reeves is expected to raise taxes in the upcoming budget. This creates some downside risks to gilts; but the impact on GBP is less certain as a firmer fiscal footing could lower the risk aversion from foreign investors
• We now expect the BoE to begin cutting rates earlier, in February 2026 (previously April), following clearer evidence of disinflation and potential fiscal tightening. Governor Bailey’s balanced tone in today’s meeting suggests a shorter pause before the easing cycle resumes
• Today’s decision reinforces our neutral stance on UK assets. UK equities continue to offer compelling value, but the near-term fiscal tightening and fragile growth outlook limit upside potential. Similarly, the BoE’s steady-hand approach supports gilts in the short term, though we expect the pace of easing to remain gradual and data-dependent as the Bank balances the final mile of disinflation against the risk of an overly sharp slowdown