Morgan Stanley pushes BoE rate-cut call to March after inflation surprise

Morgan Stanley has pushed its forecast for the Bank of England’s next interest-rate cut from February to March after U.K. headline inflation for December came in stronger than expected at 3.4% year on year. The move, issued in client notes on Jan. 22, reflects the bank’s reassessment of the sequencing of policy easing while still assuming that some monetary loosening will occur in the first half of 2026.

The bank’s Global Liquidity team emphasized that despite the delay in timing there has been "little change to the implied market rate path" overall. Market-implied pricing, Morgan Stanley notes, still embeds roughly 50 basis points of easing by the end of the second quarter, a trajectory that would put Bank Rate near 3.5% later this year if realized. That suggests the revision is chiefly a timing adjustment rather than a reversal of expectations for a return to easier policy after the Bank’s December easing cycle.

The December CPI surprise interrupted a recent string of signals supporting earlier cuts. November inflation was 3.2% year on year, and labour-market indicators had shown some cooling, with unemployment around 5.1% and services inflation softer than previously forecast. Those conditions had supported forecasts of a February cut, and Morgan Stanley economists had flagged February as possible prior to the Jan. 22 revision. The Bank of England’s most recent policy action was a 25 basis-point reduction to 3.75% in mid-December, its fourth cut in 2025, after a series of narrowly divided committee votes through late autumn.

Banks and market strategists still disagree on exact timing and terminal rates. Nomura currently expects the first 25 basis-point cut in April and sees a terminal Bank Rate of about 3.50% for 2026. UBS projects three 25 basis-point cuts across the year, taking policy down to roughly 3.0% by July. An alternative market summary has offered a conflicting read, suggesting different sequencing of cuts and a lower terminal-rate view for Morgan Stanley, but the bank’s client notes signal the more cautious March timing alongside the roughly 50 basis points of market-priced easing.

The practical consequences are immediate for portfolio managers, currency traders and gilt markets. A pushed-out cut compresses the near-term probability of earlier easing, supporting sterling and keeping shorter-dated gilts more bid, while the maintained market-implied path still leaves room for steeper falls in yields if upcoming data prompt the BoE to act sooner than markets now expect.

Key near-term indicators to watch are January CPI prints, monthly wage and pay growth, unemployment and the Bank’s communications, minutes and speeches from policymakers will be scrutinized for any shift from conservative language to a clearer easing bias. If inflation moderates back toward the 2% target alongside continued labour-market cooling, markets and many forecasters still expect multiple cuts in 2026, even as precise timing and the eventual terminal rate remain contested.