BOE Rate Cut Expectations Rise Ahead of Budget

Markets are increasing their bets on easing from the BOE, as it becomes increasingly likely that the Autumn Budget will include tax increases, leaving the pound weaker.

The Key Developments

• Futures markets increased the odds of a rate cut at Thursday's BOE meeting from near nil just a week ago to over 30% after the chancellor made a rare pre-budget speech.
• Analysts are predicting more economic hardship after the Chancellor did not rule out tax increases in the budget.
• If the BOE keeps rates unchanged, markets are likely to focus on the vote split to set odds for a December rate cut.

Weaker Pound Ahead of BOE Decision

Economists generally agree that the BOE will keep rates unchanged at its policy meeting on Thursday. However, the market has increased the odds of a rate cut happening sooner after Chancellor Rachel Reeves made an unusual speech ahead of the Autumn budget. Goldman Sachs was one of the major brokerages to predict a rate cut at the upcoming meeting last week, and the market is now pricing in a 33% chance of easing. However, it's important to note that Goldman Sachs, one of the most dovish forecasters for the BOE, anticipates 75 bps of easing next year. By contrast, futures markets expect a 60% chance of a rate cut by December, with the majority of economists seeing only 50 bps of easing in 2026. Thursday's focus will likely be on hints as to whether the next rate reduction will be in December or January.

Traders are likely to be paying close attention to the vote split and the minutes, given the absence of a planned press conference by BOE Governor Andrew Bailey. A large minority voting to cut would likely raise the odds for a December rate reduction. But if one or two members vote for easing on Thursday, that could leave the markets expecting a more hawkish BOE. However, that might not be enough to support the pound, as Britain faces high inflation and slow growth that is scaring away investors, reluctant to buy pound-denominated assets amid the uncertainty ahead of the budget.

August Budget Justifying the Rate Cut

The inflation rate has been trending higher for more than a year and stands at 3.8%, well above the 2.0% target. However, many analysts point to meagre economic growth (which was effectively flat for the first two months of Q3), suggesting that inflation has peaked. Many worry that if the Chancellor breaks her promise not to raise taxes for a second time, the economy could slow even faster amid the fiscal policy uncertainty and incline the BOE to speed up its easing cycle. The odds of a rate cut rose after Reeves' speech on Tuesday, in which she reaffirmed her commitment to her Manifesto pledge, but did not rule out raising taxes in the budget due on November 26. She has come under renewed pressure to increase revenues after the OBR last week reduced its productivity forecast for the British economy, leading to an expected £20 billion shortfall in public finances.

Cable Flirting with 1.30 Handle

Cable fell to lows not seen since April in the wake of the Chancellor's speech, testing 1.3000 after breaking outside its long-term descending channel. If prices remain below 1.3150, be it following a retest or not, the next supports lie at the round 1.2800 and 1.2700 levels. However, a sustained rally towards 1.3250 would increase the chances of a flag formation (the channel), exposing 1.3450 and 1.3600.

Source: SpreadeX | GBPUSD