How dovish is the Bank of England really? - Commerzbank

In between central bank decisions from the far north and the US, the Bank of England (BoE) meets today, Commerzbank's FX Analyst Michael Pfister notes.

BoE to cut rates more than the market expects

"We (and the market) expect the BoE to cut rates by 25 basis points to 4.75%, the second cut since the first one in August. This is supported by the fact that inflation surprised to the downside again in September after an uptick - and is thus on track to come in well below the BoE's latest forecast. With inflation figures like this, and with other central banks having already made a few more rate cuts, few analysts are likely to be critical of today's likely rate cut."

"For the Pound Sterling (GBP), the new forecasts and any indications of future interest rate cuts are likely to be more interesting. It is worth remembering that BoE Governor Andrew Bailey recently indicated more significant rate cuts. Therefore, they are likely to reduce their inflation forecasts and hint at further rate cuts. For the GBP, there is a particular risk that the BoE will be perceived as more dovish than before."

"The view that the UK is behaving more like the US, i.e. that faster growth and higher inflation require higher interest rates, seems to have taken hold. Although we still think the pound is well placed against the euro, we do see a risk, at least in the short term, that the Bank of England will cut rates more than the market expects. If this becomes apparent today, we would not be surprised to see EUR/GBP move slightly higher after today's decision."