Markets
The Bank of England kept the policy rate unchanged at 4% but hinted at a move soon, as soon as December and no later than February 2026. Risks to inflation have become more balanced, the statement now reads, and “The Bank rate is likely to continue on a gradual downward path” if disinflation progress continues. That’s less strict than the “gradual and careful” approach of September. In the split 5-4 outcome, governor Bailey was the swing vote. Four members in the group of five placed greater weight on the risk of inflation persistence, particularly through wages. Bailey as the fifth and decisive member was less hawkish. In the first-ever published rationale underpinning their views, Bailey said he finds the mechanisms underlying upside risks less convincing than those underlying the downside but saw value in waiting for more evidence of disinflation to pick up. The members voting for a cut noted the economic slack and a materially deteriorating labour market. The policy statement notes that CPI is expected to have peaked in September (3.8%). The base effects, one-off factors and increases in administered prices that caused the CPI increase through 2025 so far should fade out. Using a similar market-implied Bank Rate to the one used in the August projections – 3.5% by 2026Q3 and of which Bailey said is a fair description of his position – inflation is anticipated to decline to 2.5% by 2026Q4 and to the 2% target from 2027Q2 on. Economic growth was revised up slightly higher for 2026 (1.4%) and 2027 (1.7%) but remains below potential. The unemployment rate is expected to pick up to 5.1% by mid-2026, up from 4.8% currently.
Sterling and UK yields fell after the decision, with some caught off guard by the growing possibility of a December cut. GBP tried to recover but a fragile risk environment stands in the way. EUR/GBP remains north of 0.88. Gilt yields ease 3.5 bps at the front with a December cut now given a two-in-three chance. We think that’s an underestimation given that the government’s November 26 budget is probably going to be a belt-tightening one, further suppressing an already weak economy. Moves in other markets show UST outperformance vs Bunds. Second-tier and rarely-looked-at data from a private outplacement firm showed the most announced job cuts for any October of the last >20 years. It triggered yield declines of up to 6.5 bps at the front, showing just how much markets are eager for some input that polls the US’ economic health. German rates are down 2 bps. Yield differentials favour EUR/USD with the pair nudging higher to 1.152 but the risk environment is capping gains here as well. DXY’s failed adventure north of the 100 barrier is followed by some minor declines to 99.77 currently. Stocks lose modest ground.
News & Views
The Norwegian central bank kept its policy rate unchanged at 4% today. The Committee’s assessment is that no new information has come in that indicates a material change to the outlook for the Norwegian economy since the monetary policy meeting in September. If the economy evolves broadly as currently envisaged, the policy rate will be reduced further in the course of the coming year. Governor Wolden Bache added that the Norges Bank isn’t in a hurry to reduce the policy rate though as the job of tackling inflation has not been fully completed. Inflation is still above target, and underlying inflation has been close to 3% for some time. “The outlook suggests that inflation will return to target without a large increase in unemployment,” Wolden Bache said, adding that excessively tight monetary policy could restrain economic activity. The September outlook envisioned one rate cut per year in the coming three years. EUR/NOK is going nowhere today at 11.73. Norwegian money markets attach a 45% probability that the next policy rate cut comes by the end of Q1 2026.
The Czech National Bank left its policy rate stable at 3.5% and expects broad stability in the next quarters in light of overall inflationary risks. These stretch from a possible acceleration of money supply growth in the economy due to household loans and growth in total public sector spending over continued rapid wage growth in combination with ongoing tension in the labour market to rising food prices and the persistent inflation in services. A relatively tight policy is still needed even if the CNB slightly lowered CPI forecasts for this year and next, respectively from 2.6% to 2.5% and from 2.3% to 2.2%. The central bank also lowered this year’s growth outlook from 2.6% to 2.3%. The Czech koruna in unnerved by the expected outcome, changing hands at EUR/CZK 24.34.
