Officials from the Bank of England, including Deputy Governors Dave Ramsden and Clare Lombardelli, shared their thoughts with the Treasury Select Committee about the November monetary policy report. Ramsden noted that the current economic situation matches their baseline predictions, which suggests they may gradually ease policy restrictions. Lombardelli expressed worries about inflation risks, explaining they are due to structural issues. She questioned whether the current policy is restrictive enough and hinted at a slower pace of rate cuts as the cycle finishes. The budget is expected to lower inflation by 0.4-0.5 percentage points starting in the second quarter of 2026.

Inflation And Budget Impacts

Catherine Mann pointed out that upcoming budget changes would help reduce inflation but also recognized changes in behavior due to ongoing inflation. She remarked on companies’ hesitance to lower prices, even with weak demand. Mann indicated that, thanks to public sector employment, the overall labor market is in better shape than it appears, even though consumer confidence took a hit from pre-budget uncertainty. The British Pound performed differently against major currencies, showing strength against the Japanese Yen. It rose against the Euro and US Dollar but dropped against the Canadian Dollar, Australian Dollar, New Zealand Dollar, and Swiss Franc. This reflects the economic insights shared by Bank of England officials. From these comments, it seems the Bank of England is pushing back against market expectations for aggressive rate cuts. The concern about inflation, especially from Lombardelli, indicates a longer period of higher interest rates. This is supported by the latest CPI data from November 2025, which reported inflation stubbornly at 2.8%, above the 2% target.

Interest Rate Derivatives And Market Expectations

For those trading interest rate derivatives, this suggests the market might be overestimating the pace of rate easing for 2026. After two small cuts earlier in 2025 lowered the Bank Rate to 4.75%, these comments hint at a pause or a slower cutting cycle ahead. It may be wise to prepare for fewer rate cuts than what the SONIA futures curve currently indicates for the first half of next year. The divided commentary also highlights increased uncertainty around future policy choices, likely leading to more market volatility. Options traders may find it beneficial to buy straddles on short-sterling futures leading up to the next few MPC meetings. This strategy could be profitable if there are larger-than-expected changes in interest rate expectations, regardless of the direction. In the foreign exchange market, this cautious approach should continue to support the Pound Sterling. The currency has already shown strength, especially against the Japanese Yen. We can expect GBP to hold strong against currencies with central banks that are more dovish, making long GBP/JPY or long GBP/CHF positions attractive through forwards or options. This careful stance from the BoE comes despite recent signs of economic weakness, like the minimal 0.1% GDP growth recorded in the third quarter of 2025. However, with wage growth at a high of 5.1%, policymakers seem to be focusing more on controlling inflation than on boosting growth. This challenging balance reflects their hesitation to indicate significant policy easing. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now