[MARKET ANALYSIS] An extended hold remains the base case for the BoE, and while the risks remain hawkish the dovish points dominated
Overall, the extended hold remains in play and while the risks remain towards tightening given the Middle East and associated inflation implications, Governor Bailey made clear that they are not edging towards a hike.
The hold was as expected, though subject to a 6-3 split, with Mann joining Pill and Greene in calling for a 25bps hike. The reasoning behind Pill and Greene’s decision was familiar, while Mann was not a surprise given her commentary in June’s paragraph and a speech since; specifically, her decision was dictated by the MoU failing.
Focus from the statement is primarily on the dovish side of things, which drove the eventual move at the time as a kneejerk hawkish reaction to the voter split unwound. Specifically, the officials pointing to dovish optionality if the conflict resolves, a point that does not support longer-end yields (i.e. in contrast to the post-Fed move in US rates, where the curve notably steepened). Further, the two-way risks emphasised neatly by Ramsden, who said that while upside inflation risks materialising could warrant a hike, on the flip side he would consider resuming cuts if upside risks subside and underlying disinflation continues, with domestic developments pointing to a more benign inflation outlook.
Thereafter, the main action came from the press conference. Firstly, Lombardelli (voted to hold votes) said her decision was not a close call. A comment of pertinence now Mann has dissented as Lombardelli, based on historical commentary, was the next in-line to shift hawkishly. To remind, on the 9th of December 2025, she said she worries more about upside inflation risks, is less convinced vs peers about policy restrictiveness, among other points. Secondly, but sparking the main move, Governor Bailey in response to a question about tightening said “do not leave the room thinking the BoE is edging towards a hike, because frankly there’s nothing in what I have said along those lines”. A remark that spiked Gilts to a session high and weighed on GBP.
Ahead, given the statement and paragraphs, any information around second round effects will be key in determining if the BoE will move towards tightening or continue to hold in restrictive territory, before then potentially edging towards easing if/when the conflict is resolved. Of course, the risk remains hawkish and increasingly so the longer the conflict continues, as the risk of energy-driven second round effects occurring and being of a notable magnitude, increases.