BOE Expected to Cut Rates Even as Inflation Rises

The Bank of England is widely expected to lower its base rate from 4.25% to 4.00% at its upcoming August meeting, even as inflation has unexpectedly accelerated to 3.6% year-over-year in June. It would mark the fifth rate cut since August 2024, signaling a decisive pivot toward supporting economic activity over strictly controlling inflation.

Growth Fears Eclipse Inflation Alarm

Although services inflation remains elevated at 4.7%, and core inflation pressures persist, policymakers are increasingly focused on signs of a slowdown. Job vacancies have fallen at the sharpest pace since the pandemic, wage growth is moderating, and retail sales are softening. The Monetary Policy Committee (MPC) appears to be betting that the recent inflation bump is transitory and that tightening conditions could stall a fragile recovery.

While inflation expectations among consumers remain above target, the central bank argues the underlying momentum has slowed. Fiscal drag from public spending cuts and reduced business investment further bolster the case for easing.

Internal Debate Turns Toward Pace

MPC member Alan Taylor has advocated not only for the expected August cut but also for up to two additional cuts by year-end, warning that the window to stabilize growth is closing. Others remain cautious, pointing to upside risks in energy and services prices.

Market pricing currently implies an 88% probability of a rate cut in August, with a second cut expected in November. Swap markets also show softened expectations for further hikes in 2026, a clear signal that investors are preparing for a more dovish trajectory.

Macro Signals Favor Easing

The latest labor data confirms the shift: hiring has slowed, and wage growth is easing. Private consumption, already dented by cost-of-living pressures, is unlikely to recover without monetary relief. Business surveys suggest confidence has stalled across manufacturing and services.

At the same time, long-dated gilt yields have begun to fall, and sterling has weakened, reflecting broad expectations that UK monetary policy is decoupling from the more hawkish tone in the US and Eurozone.

Market Impact and Strategic Repricing

The pound lost nearly 4% in July, and UK equity markets have begun to reprice rate-sensitive sectors. Financials and homebuilders led recent rallies, while defensive utilities and staples underperformed. Forward guidance from the BOE will now carry added weight as traders position for rate-driven volatility in FX and fixed income markets.

Tips for Traders

• Monitor GBP/USD and UK yield curves—a dovish cut may extend pound weakness and compress long-end rates.

• Watch FTSE 100 sectors exposed to rate sensitivity, including banks, REITs, and consumer finance stocks.

• Position around 2–5 year gilts for potential duration gains if the easing cycle accelerates.

• Evaluate inflation swaps and breakevens for signs of long-term credibility erosion or repricing.

• Follow MPC member speeches closely—language on services inflation or wage growth will steer sentiment.

• Consider relative rate plays between BOE, ECB, and Fed paths to exploit divergence across G10 curves.