GBP flows: Little impact from Mann but GBP risks on the downside

Comments from the BoE’s Mann this morning haven’t had a great deal of impact, but it is interesting to see the rationale behind her decision to vote for a 50bp rate cut last time, given her history as a hawk on the MPC. The decision appears based on a view that the labour market is about to weaken significantly due to weak demand conditions, and Mann characterises herself as “activist”, so she prefers to go for 50bp immediately rather than move more gradually. She attempts to maintain her hawkish credentials by arguing for restrictive policy in the future and a higher long term bank rate than many expect, saying she is at the higher end of a 3-3.5% range of estimates for the long term equilibrium interest rate. While this certainly suggests she will be voting for another 25bp at the next MPC meeting in March, which is currently only priced as around a 25% chance of producing a 25bp cut, her comments don’t suggest she has completely transformed into a dove. Even so, with the market only pricing the bank rate falling to 3.8% by the end of this year, she could remain a dove through the rest of this year.

EUR/GBP is not much changed this morning, and it looks hard to break the 0.83-0.84 range in the near term. But we do see risks for rates as being on the downside from current market pricing, and Mann’s comments seem supportive of that view. With GBP also at historically expensive levels against the EUR, this suggests to us that the risks are still on the upside for EUR/GBP. The EUR could still be held down by concerns about tariffs being more targeted to the EU than the UK, but this is to some extent already priced in, and if these EU targeted tariffs do not materialise EUR/GBP should head towards 0.85.