Morgan Stanley has adjusted its projections for the Bank of England's monetary policy path. The firm now anticipates the BoE will implement a 25-basis-point interest rate cut in both April and November of 2026, followed by an additional cut in February 2027. This would result in a total reduction of 50 basis points for 2026, with further modest easing expected the following year. This revised outlook marks a shift from the previous forecast, which called for cuts in March, July, and November of 2026, totaling 75 basis points. The adjustment reflects a reassessment of market expectations, acknowledging a slower-than-anticipated decline in UK inflation and greater economic resilience.

The revision to a later start and fewer cuts in 2026 is based on several key macroeconomic factors: 1. A more gradual inflation decline: Recent data on UK core CPI and wage growth indicate persistent inflationary pressures. Volatile energy prices and a slower-than-expected moderation in services inflation have contributed to this view. Morgan Stanley believes the BoE will maintain a restrictive policy stance for a longer period to ensure inflation sustainably returns to the 2% target, thereby avoiding the risk of a rebound triggered by premature easing. 2. Stronger-than-expected economic resilience: The UK labour market remains relatively robust, with unemployment staying low. Consumer and investment activity have shown notable resilience. While GDP growth has slowed, there are no clear signs of a significant hard landing, reducing the urgency for the BoE to initiate aggressive easing measures prematurely. 3. The influence of the changing global macro environment: A retreat in international oil prices following eased geopolitical risks in the Middle East has reduced imported inflation pressures. However, major global central banks, including the Federal Reserve and the European Central Bank, are adopting a more cautious approach, with potential rate cuts proceeding slower than previously expected. This context makes it difficult for the BoE to significantly lead the easing cycle, as doing so could exert substantial downward pressure on the British pound. 4. A shift towards a "tight first, ease later" policy rhythm: By delaying the first cut from March to April and removing the July cut—replacing it with moves in November and the following February—Morgan Stanley's forecast reflects a "wait-and-see, then step cautiously" approach. The reduction in the total annual easing from 75 to 50 basis points indicates a more conservative assessment of the BoE's capacity for monetary loosening this year.

The following table compares key differences between Morgan Stanley's previous and current forecasts:

**Near-term Outlook** In the short term, the BoE's March policy meeting will be a critical window for observation. Should March inflation data continue to show stickiness, market pricing for an April rate cut—currently around 60-70%—could decline further. This scenario might lead to a temporary strengthening of the pound and UK government bond yields. From a medium-term perspective, Morgan Stanley's adjusted forecast aligns more closely with the prevailing market view: the BoE's total easing for the year is likely to fall within a 50-75 basis point range, with a rhythm characterised by a "wait-and-see stance in the first half of the year, followed by cautious, incremental steps in the second half." Key indicators to monitor include wage growth, core services inflation, and quarterly GDP revisions, as these will be crucial determinants for the anticipated April and November rate cuts.

**Risk Factors** Upside surprises in inflation or a reacceleration in wage growth could prompt the BoE to delay or even pause its cutting cycle. Conversely, a significant slowdown in economic growth or a rapid deterioration in the labour market might force the central bank to return to a more aggressive easing path. Additionally, a synchronized global slowdown in monetary easing could increase pressure on the pound, amplifying risks of imported inflation for the UK.

Morgan Stanley's updated forecast suggests a more cautious approach to interest rate cuts by the BoE in 2026. The total expected easing has been reduced to 50 basis points, with the first cut postponed to April and some easing pushed into February 2027. This revision reflects the combined impact of persistent inflation, economic resilience, and the global policy environment, pointing towards a "tight first, ease later" strategy for the UK central bank. Investors should closely monitor inflation and labour market data releases between March and April.

**Frequently Asked Questions** 1. Q: Why did Morgan Stanley delay the first BoE rate cut from March to April? A: The primary reason is that recent UK inflation data, particularly core CPI and services inflation, have been declining more slowly than previously expected, while wage growth remains sticky. Morgan Stanley judges that the BoE requires more evidence to confirm inflation is sustainably moving towards the 2% target, thus delaying the first easing to April to avoid a potential inflationary rebound.

2. Q: Why was the July rate cut removed, reducing the total number of cuts in 2026 from three to two? A: The UK economy has demonstrated considerable resilience, with a robust labour market and consumer and investment activity avoiding a significant downturn. Although GDP growth has slowed, the economy has not entered a recession. Morgan Stanley believes there is no necessity for the BoE to accelerate easing significantly mid-year. Removing the July cut reflects a more cautious "wait-and-see, then step cautiously" approach, with a 50-basis-point total for the year being more consistent with the current macroeconomic reality.

3. Q: What is the logic behind pushing part of the easing into February 2027? A: This reflects the "tight first, ease later" policy path assessment. Morgan Stanley expects inflationary pressures to persist in the first half of 2026, requiring the BoE to maintain a restrictive stance. As inflation declines further and potential economic slowing emerges in the second half of the year, room for easing will gradually open up. Therefore, postponing some easing to February 2027 helps control inflation risks while providing a buffer for growth.

4. Q: Following this adjustment, has the market's mainstream expectation for the BoE's total annual easing also been revised downward? A: Yes, market pricing has already turned more conservative. The mainstream expectation for total annual easing now falls within the 50-75 basis point range, largely aligning with Morgan Stanley's new forecast. The probability of more aggressive scenarios, previously factoring in over 100 basis points of easing, has decreased significantly, reflecting the market's renewed acceptance of a "higher for longer" interest rate path for the UK.

5. Q: Which data should investors focus on currently to gauge the BoE's actual rate-cutting rhythm? A: Priority should be given to CPI (especially core CPI and services inflation), wage growth, and labour market data (such as unemployment and employment changes) released in March and April. Secondly, track quarterly GDP revisions and consumer confidence indicators. Also, monitor movements in the pound's exchange rate and the UK government bond yield curve, as these will directly influence signals from the April policy meeting and market pricing for a November cut. Maintaining flexible positioning to dynamically respond to data outcomes is advised.