LIVE MARKETS-Here's why the BoE could be set for a hawkish shift

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HERE'S WHY THE BOE COULD BE SET FOR A HAWKISH SHIFT

There is broad consensus the Bank of England will cut rates by 25 basis points on Thursday, while markets continue pricing in around 90 bps by end-2025.

The justification for those further meaningful cuts is expectations of weakness in the British economy, not helped by U.S. tariffs, but not everyone is sure about that.

ING economist James Smith says the rate outlook priced by markets "is heavily linked to what's now priced into the Federal Reserve curve in the U.S."

"We'd need to see clearer signs that the UK economic outlook is materially deteriorating. And there isn't much sign of that right now, beyond some weaker survey readings," Smith says.

"Tariffs are unlikely to deliver a major, direct hit. Britain simply isn't that exposed to U.S. goods demand."

He acknowledges that "a U.S. recession would be more problematic, given that it would drag down the UK's more significant trade in services."

However, ING's base case is "a pronounced (U.S.) slowdown rather than outright recession."

Smith also argues that the (UK) economy is getting a decent tailwind from government spending, UK-EU talks could reduce border friction, and the government hopes improved trading arrangements will convince the Office for Budget Responsibility to unlock more fiscal 'headroom.

(Stefano Rebaudo)

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