BoE rate view change; ECB holds with hawkish tone

Highlights: The BoE cut and the ECB held rates, as expected. Yet the BoE cut was by the finest of margins, so we have revised our forecasts, with the next cut now expected in April, rather than February. At the end point, we are more dovish than the market, which should help support GBP IG credit. For the ECB, while growth-inflation projections were lifted higher, policymakers opted to maintain the most of flexibility for the next move.

• As expected, the BoE narrowed the rate gap with ECB by 25bps. BoE governor Bailey tipped the balance of the committee, resulting in a 5:4 decision to cut rates. Bailey had shifted his view because he saw more evidence of a labour slowdown that was hard to reconcile with the more hawkish inflation expectations
• The BoE expects the budget policies, particularly on energy, to cut about 0.5 per cent off inflation by April. The lower November CPI is what sealed the cut today, but the BoE reiterates that they will be data dependent. Next February’s Agents’ survey of wage expectations will play key part in steering the pace of further cuts.
• With the BoE hawks standing firm, we now lean towards the next cut happening in April, rather than February – but it will be a close call. This is closer to market expectations. We then differ from the market with our more dovish expectations of two further cuts in July and November
• The ECB left policy rates on hold as anticipated but upgraded both growth and inflation projections across the forecasting horizon. President Lagarde highlighted that the ECB remains in “a good place” but since its not static, policymakers want to “keep all potentialities in the table” thus allowing for more flexibility than market expectations that the next move would be a policy rate hike
• Rates fluctuated during the day with more hawkish BoE voting and guidance and ECB economic projections initially triggering a selling in bonds. However, a weaker than expected CPI print in the US and ECB’s clarification that “it keeps all options open” benefited duration and reversed the moves. EUR/USD was little changed as a result (1.173) while GBP strengthened near 0.3 per cent against all major peers (GBP/USD, 1.338). Regional equities climbed across the day echoing the global risk-on tone, with UK stocks (0.6 per cent) lagging European peers (1.0 per cent), and US equities (1.4 per cent) intraday
• We expect the ECB will leave rates at 2.0 per cent across 2026. EUR could benefit from any further modest USD weakening, more than GBP, but given an absence of domestic catalysts in both economies, rallies should be capped. We prefer EUR periphery debt over core and Gilts, and mild overweight EUR and GBP IG quality credit. Our neutral view on UK equities compares with a mild underweight in France, and our preference for Eurozone periphery equities in Italy and Spain where we see better sector-driven opportunities