KBC Sunset Market Commentary 08/05/2025 via Trader Talent

Daily Market Overview

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Markets

•          The Bank of England stuck to its quarterly cutting pace in place since August of last year. They lowered the key policy rate by 25 bps to 4.25% in a 3-way vote. Five out of nine members supported the decision with two in favour of a larger, 50 bps, rate cut and two in favour of keeping rates steady. Minutes of the meeting showed that “prior to the latest global developments, most members in this group had judged that this policy decision would be finely balanced between no change in Bank Rate and a further reduction.” Going into the release, some expected the BoE to drop a reference to gradual rate cuts. That is not the case. Based on the Committee’s evolving view of the medium-term outlook for inflation, a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate. Similarly, markets feared significant downgrades to the expected growth path. BoE Bailey at the press conference downplayed those concerns as well. Short term prospects faced an upward revision because of stronger actual data (2025 Q2: 0.8% Y/Y from 0.3%), medium term was slightly downwardly revised (2026 Q2: 1.3% Y/Y from 1.5%), while the long term end point is pretty much the same (2027 Q2: 1.5% Y/Y from 1.4%). This baseline forecast is conditioned on the market path for interest rates. Deputy governor Ramsden added that downward revisions to business investments and the increasing (precautionary) household savings rate could easily unlock upside potential if global uncertainty is reduced, for example by the flagged UK-US trade deal. UK inflation is likely to rise to 3.7% by September, partly because of increases in energy prices and increases in some regulated prices such as water bills. Inflation is expected to fall back to the 2% target after that. But there are risks around this path of inflation. Bank staff prepared two alternative scenarios. In one scenario, there could be weaker supply and more persistence in domestic wages and prices, including from second-round effects related to the near-term increase in CPI inflation. In another scenario, inflationary pressures could ease more quickly owing to greater or longer-lasting weakness in demand relative to supply, in part reflecting uncertainties globally and domestically. Bailey stressed that these are only two examples of a wide range of different paths the economy could take. In the former, inflation ends up 0.4 ppt higher over the forecasting period. In the latter, the path is 0.3 ppt lower over the policy horizon. The baseline projection is 3.4% Y/Y for 2025 Q2, 2.4% for 2026 Q2 and 1.9% for 2027 Q2. The UK Gilt curve bear flattened (UK 2-y yield +6 bps) after the BoE meeting as the central bank wasn’t as doom and gloom as feared (hawkish cut), sticking to its gradual approach. EUR/GBP dipped from 0.8510 to 0.8480. The amount of global uncertainty calls for patience, as witnessed in today’s Riksbank and Norges Bank decisions as well. It should serve as a reminder to the dovish-skewed market positioning going into the June ECB meeting. EMU money markets almost fully discount a June rate cut, with another one priced in by September.
 

News & Views

•          The Swedish Riksbank left its policy rate unchanged at 2.25%. The uncreased uncertainty abroad makes the economic outlook slightly weaker. The impact on inflation is more difficult to assess. The executive board still sees monetary policy currently as well balanced providing the room to assess further information. Still it is somewhat more probable that inflation will be lower than that it will be higher compared to the March forecast. The central bank concludes that a slight further easing of monetary policy could occur going forward. Swedish money markets already (more than) fully discounted an additional RB rate cut later this summer (August or September). EUR/SEK holds the 10.90 area after having a good run in February/March. The Norges Bank (NB) also left its policy rate unchanged at 4.50%, the cycle peak in place since December 2023. The MPC also sees uncertainty about future economic developments, but the outlooks still implies that the policy rate will most likely be reduced during the course of 2025. In March, the NB guided the policy rate to be near 4.0% by the end of the year. Inflation has fallen markedly from the peak but is still above the 2% target. For now, a restrictive policy is still needed to bring inflation down to target within a reasonable time horizon. Trade barriers have become more extensive, and there is uncertainty about future trade policies. This may pull the interest rate outlook in different directions. The NB will judge on the basis of new forecasts in June. For now markets still only see a 50/50 chance of a rate cut next month. EUR/NOK is trading little changed near 11.70.

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