BoE Deputy Governor Clare Lombardelli reinforced the case for a “gradual and careful” approach to policy easing in a speech today. She noted underlying inflation “have continued to fall” despite noises. Monetary policy is still restrictive and will continue to balance the need to lower inflation with the risk of undermining already soft demand.

Lombardelli highlighted wage growth as a central focus in the disinflation process, particularly given its outsized influence on domestic services pricing. She noted that private sector regular average weekly earnings rose 5.9% in February, still well above levels consistent with BoE’s inflation target. Services inflation, a key proxy for persistent price pressure, remains elevated at 4.7% as of March. Both indicators suggest that while progress has been made, inflationary momentum in wage-sensitive sectors continues to pose a challenge.

She also addressed the global backdrop, warning that higher US tariffs and increasingly uncertain American trade policy could lower growth and inflation in the short term by dampening global demand and trade volumes. However, over the longer term, if trade fragmentation continues, it could “reduce output and productivity and would raise inflationary pressures.”

Full speech of BoE’s Lombardelli here

In a speech following BoE’s Monetary Policy Report released yesterday, Governor Andrew Bailey elaborated on the two alternative scenarios laid out alongside the baseline forecast.

The first scenario envisions that heightened global and domestic uncertainty could suppress UK demand more than currently expected, “easing inflationary pressures”.

In contrast, the second scenario assumes that recent energy price increases could trigger renewed second-round effects in domestic prices, with tighter supply conditions “increasing inflationary pressures”.

Bailey emphasized that these scenarios are not simply stylized upside or downside risks to inflation but are meant to illustrate the underlying mechanisms that could shift the inflation path.

He stressed, “it matters whether inflation differs from the baseline because of demand or supply”. And, the size of the required monetary policy response might be different.

From a monetary policy standpoint, Bailey explained that a demand-driven downside scenario would likely warrant a stronger policy response than a supply-driven upside shock. That’s “simply because there is more of a trade-off to balance when inflation and activity move in different directions,” he added.

Full speech of BoE’s Bailey here.

BoE lowered its benchmark Bank Rate by 25 basis points to 4.25% , in line with market expectations. However, the decision revealed a rare three-way split among policymakers.

Five members supported the 25bps reduction, while Catherine Mann and Chief Economist Huw Pill voted to keep rates unchanged. On the dovish end, Swati Dhingra and Alan Taylor backed a deeper 50bps cut.

In its accompanying statement, BoE reiterated that a “gradual and careful approach” remains appropriate as it withdraws monetary restraint.

While acknowledging progress on inflation, the central bank emphasized the need for policy to stay “restrictive for sufficiently long” to ensure inflation returns sustainably to the 2% target.

In its latest Monetary Policy Report, the BoE’s baseline forecast sees CPI inflation rising to 3.5% in Q3 2025 before easing back to 2% in the medium term.

But policymakers outlined two risk-laden alternative scenarios. The first, a lower demand scenario, assumes heightened uncertainty depresses domestic spending and inflationary pressures fade more quickly. Under this path, the economy faces a wider output gap and inflation runs -0.3% lower than baseline by the three-year horizon.

Conversely, the second scenario envisions higher inflation persistence, where near-term rise in headline inflation triggers second-round effects in wages and prices, compounded by weak productivity growth. In this case, the impact on growth is modest, but inflation runs 0.4% above baseline throughout the forecast period.

Full BoE statement here.

Full BoE statement here.

BoE is widely expected to deliver a 25 bps rate cut today, bringing the Bank Rate down to 4.25%. Governor Andrew Bailey and fellow policymakers have consistently emphasized a cautious approach to cutting rates, and that tone is expected to persist amid lingering uncertainties.

Most economists surveyed by Reuters anticipated BoE will stick to a quarterly pace of easing, suggesting Bank Rate ends the year at 3.75%. However, market participants are slightly more dovish. Traders are now fully pricing in three more cuts by the end of 2025, projecting a rate of 3.50% at year-end.

There might be some hints on how dovish BoE is leaning to, from today’s vote split and updated economic projections. In particular, focus will fall on whether known dove Swati Dhingra would push for a larger 50bps reduction, and whether there are material downgrades to both growth and inflation forecasts.

From a market perspective, EUR/GBP will be closely watched for signals on investor sentiment following the decision.

EUR/GBP is currently testing support at 55 D EMA (now at 0.8460). Strong rebound from current level would keep rally from 0.8239 alive. A break above 0.8539 resistance should confirm that fall from 0.8737, while deep, has completed as a correction. Retest of 0.8737 should be seen next.

On the flip side, sustained break below the 55 D EMA would raise the risk of near-term bearish reversal, and open the path back toward the 0.8221/0.8239 support zone.