Bank of England Is "Biding Time", Says Deutsche Bank

08:29 AM EDT, 09/18/2025 (MT Newswires) -- The Bank of England's Monetary Policy Committee kept Bank Rate on hold at 4% on Thursday, as expected, said Sanjay Raja, Deutsche Bank's chief United Kingdom economist.

Thursday's decision was never really about a rate change, noted Raja. It was about MPC positioning alongside the BoE's quantitative tightening (QT) decision.

MPC divisions remain, pointed out the Deutsche Bank economist. With Thursday's decision coming with a 7-2 vote tally, one thing is clear: the MPC remains fractured. The 'hawks' on the MPC see structural changes in the labor market leading to stickier consumer price index and elevated inflation expectations.

The 'centrists' on the MPC see downside risks surrounding the economic outlook, which could lead to a "more substantial weakening in demand" -- while acknowledging upside risks to inflation. The 'doves' on the MPC continue to see the inflation hump normalizing and "a less restrictive policy path" needed "to insure against an increased risk of recession, below-target inflation and a further deterioration in supply capacity."

The bank warned of a change in forward guidance on Thursday. But the MPC stuck to its long-held guidance that a "gradual and careful approach to the further withdrawal of monetary policy restraint remained appropriate."

The MPC also reiterated that monetary policy wasn't on a pre-set path -- and the MPC "would remain responsive to the accumulation of evidence." Put simply, a Q4 2025 rate cut remains very much on the table with the MPC doing little to shift market expectations one way or another, added Raja.

QT continues, as expected, pointed out Deutsche Bank. While there were no surprises on the QT envelope -- which came in line with the bank's expectation of 70 billion pounds -- the BoE has skewed its active gilt sales more towards shorts (40%) and mediums (40%) as opposed to longs (20%).

Interestingly, Thursday's QT decision wasn't unanimous, with Chief Economist Huw Pill voting for a larger QT envelope (100 billion pounds) and external MPC member Catherine Mann voting for a smaller QT envelope (62 billion pounds).

Deutsche Bank's call remains one more rate cut in Q4 2025 and two further rate cuts in 2026. The bank continues to see one more rate cut to end the year (December).

Deutsche Bank still thinks that the Bank Rate will settle closer to 3.25% ahead of next summer, but it sees upside risks to its terminal rate projection. Where wage settlements and underlying inflationary pressures go over the coming months will be crucial in determining the BoE's next steps.

MT Newswires does not provide investment advice. Unauthorized reproduction is strictly prohibited.