BoE rolls the pitch for a rate cut

Highlights: The Bank of England’s (BoE) February meeting delivered a clear dovish signal, with policymakers keeping the Bank Rate at 3.75 per cent but signalling a growing appetite for easing through a more supportive voting split and softer guidance. Falling inflation, easing wage pressures and a gradual weakening in labour market have strengthened confidence that price risks are diminishing, even as pockets of economic resilience persist. Markets responded by pushing Gilt yields lower and weakening sterling, reflecting expectations of earlier and deeper rate cuts. We continue to expect the BoE to begin easing from April, supporting our constructive view on UK Gilts, particularly in the 7-10-year segment, while maintaining a cautious stance on sterling and favouring defensive, internationally diversified UK equity exposure.

• The Bank of England delivered a clear dovish signal while keeping the Bank Rate unchanged at 3.75 per cent. Although the hold was widely expected, the voting split and the accompanying communication revealed a stronger-than-anticipated appetite for easing, with four members supporting a cut. This highlights a rising confidence that inflation pressures are fading and points to a meaningful shift towards policy accommodation
• Recent economic data have reinforced this cautious stance. Underlying inflation continues to ease, while the labour market is softening amid slower hiring and rising slack. Despite pockets of resilience in activity indicators, there is limited evidence of a sustained recovery in domestic demand. Policymakers are therefore turning increasingly confident that inflation risks are diminishing, supporting our view that rate cuts are likely to resume in April
• Market reaction reflected this dovish pivot. Gilt yields declined across the curve, led by the front end, as investors priced in earlier and deeper easing. Sterling weakened against both the US dollar and the euro, reflecting the softer policy outlook. Overall, markets have interpreted the BoE’s messaging as validating expectations of an extended easing cycle
• Portfolio implications: The BoE’s dovish pause and guidance strengthen the case for UK Gilts, with Bank Rate expected to trend towards 3.0 per cent by end-2026. We see attractive opportunities, particularly in the 7-10-year segment, supported by favourable carry and capital appreciation potential. This underpins our mild overweight stance on UK Gilts which should benefit from falling rates. Sterling upside is likely to remain limited, while UK equity positioning should favour defensive and internationally diversified names over domestically focused stocks