Ranjiv Mann, Senior Fixed Income Portfolio Manager at AllianzGI, has provided his thoughts ahead of the Bank of England (BOE) meeting on 20 March 2025.
The UK economy grew by 0.9% in 2024, with expectations that it is unlikely to grow much beyond this rate in 2025. At the February BOE policy meeting, the Bank cut its growth forecasts for 2025 by half to just 0.7%, with the market consensus in recent months also becoming more downbeat on the UK outlook through 2025.
Although the Chancellor put emphasis on a growth strategy in a speech at the end of January, pledging a series of infrastructure projects, near-term growth prospects remain dim. Recent survey data suggests economic activity remains stable at best, with manufacturing activity a pocket of weakness given tariff threats that continue to weigh on business sentiment.
UK employment surveys have weakened notably in recent months as companies grapple with the rise in employers’ national insurance contributions and the minimum wage that were announced in the October 2024 Budget. Labour market uncertainty is clearly weighing on consumer demand, with consumer confidence indicators deteriorating in recent months.
Inflation projections, meanwhile, have been moving in the other direction. CPI inflation rose 3% y/y in January, above the Bank’s own projections. The BOE’s forecasts rely on underlying services inflation to continue slowing as wage pressures ease. Underlying services has inflation softened, providing some comfort to policymakers, although companies are passing on rising costs from tax hikes and the disruption of global supply chains coming from growing trade uncertainty.
In the near term, focus will also turn to the government’s Spring statement on 26th March. The government looks to have run out of fiscal space against its fiscal rules. Pressure is growing on the government to take corrective action to cut spending further and possibly also announce new tax raising measures to fill the hole in the public finances. A government that remains firmly committed to its fiscal rules could bring the BOE back into play.
At the February BOE policy meeting there was a 7-2 vote to cut the Bank rate by 25bp to 4.50%, with the dissenters in favour of a 50bp cut – a dovish surprise relative to expectations. While this raises the probability of a cut at the March meeting and BOE Governor Bailey recently signalled growing concerns about the weakness of domestic demand, there seems to be a divergence in views amongst the committee. There are still likely to be some members supporting a more cautious approach on future rate cuts given the uncertainty on the inflation outlook. We believe the risks are skewed towards a more aggressive rate cutting cycle in 2025 than current market pricing, especially if the risks grow of a transatlantic trade war.
The UK macro-outlook, pressure on the UK government on its fiscal policy stance, current BOE policy pricing and Gilt valuations present an attractive outlook for Gilts both on an outright basis and cross market basis.
All data from Bloomberg.
