Hawkish BoE Cut and Neutral ECB Hold

• The BoE announced another widely expected quarterly rate cut in a 5–4 split vote, in a more hawkish decision than expected by markets that had been conditioned by ‘dovish’ data earlier in the week. We expect the BoE will cut by 25bps in each of 1Q and 2Q26 to a terminal rate of 3.25%; markets see one cut and toss-up odds of another.

• The ECB kept all its settings unchanged in today’s announcement, with the deposit facility rate maintained at 2.00%, accompanied by upward revisions to its near-term GDP and HICP forecasts. The latter prompted a move higher in European yields and the EUR, only to be shot down by Lagarde giving little indication that a rate hike (nor cut) may be under consideration in the near-term, with ECB policy well-balanced and set to remain unchanged for the foreseeable future.

BoE MAKES HAWKISH TWEAK TO STATEMENT

As expected by markets and economists, the Bank of England (BoE) delivered a sixth consecutive once-a-quarter 25bps rate cut to place Bank Rate at 3.75%, 150bps below the 5.25% peak it reached in August 2023 that lasted until the following August when rate cuts began. The Monetary Policy Committee (MPC) was divided 5–4 across cut-hold lines, with BoE Gov Bailey casting the deciding vote in favour of additional easing—after having voted with a majority of 5 in favour of a hold at the November announcement.

Following a lower-than-forecast November inflation print released yesterday and a mixed labour markets report on Tuesday, markets were going into the decision with a slightly more dovish leaning than what was presented by the vote split (possibly expecting a 6–3 decision). The statement also leaned on the hawkish side of things in that it left guidance as “Bank Rate is likely to continue on a gradual downward path” based on current evidence (vs. “if progress on disinflation continues” in November) but added that “judgements around further policy easing will become a closer call.”

The BoE’s vote split and the inclusion of a hawkish component to its statement look somewhat at odds with economic results in the U.K. which, alongside Budget measures,  have reduced inflationary risks for the quarters ahead. With GDP data to October, the U.K. has failed to grow for four consecutive months, with three of those months seeing 0.1% m/m contractions. On the employment front, aggregate payrolls have fallen by ~155k in the year to November; with the unemployment rate rising to 5.1% as of October (different survey) compared to 4.4% at end-2025.

As for inflation, it slowed to 3.2% in headline and core terms in November (the former below the BoE’s forecast of 3.4%), while services prices growth came in at 4.4% (a smidge below the BoE’s estimate of 4.5%). According to Dep Gov of MonPol Lombardelli, the measures announced in the Budget (mainly fuel duty freeze, energy bill reductions) would reduce inflation by as much as 0.5ppts from 2Q26. Yet, Lombardelli has voted for a rate hold at each of the last five decisions as have Pill, Greene, and Mann who seem to need much more convincing to support policy easing.

Having gone into today’s decision with expectations for a more neutral/less hawkish announcement, the BoE’s statement and accompanying minutes surprised markets, lifting U.K. yields by around 5bps across the curve versus pre-statement levels. In line with this move, traders reduced their bets on cumulative easing by end-2026 by around 5bps to a cumulative 36–37bps, roughly equivalent to one more 25bps rate cut (pencilled in for the April or June decision) with about toss-up odds for another at some point in 2H26 and then steady rates beyond this point. At Scotiabank Economics, we forecast that the BoE will cut rates by 25bps in each of 1Q and 2Q26 to a terminal rate of 3.25%.

LAGARDE COOLS HIKE SPECULATION, DESPITE HIGHER INFLATION AND GDP FORECASTS

The European Central Bank (ECB) kept all its settings unchanged in today’s announcement, with the key deposit facility rate maintained at 2.00% as was universally expected, in an unanimous decision. The focus of today’s decision was not on monetary policy settings, but instead on the bank’s quarterly refresh of its economic forecasts, with the ECB’s staff lifting its GDP growth and HICP inflation estimates for 2026, and President Lagarde’s press conference, who did not feed the market’s bets on rate hikes in 2026.

The ECB kept its guidance on rates unchanged, saying that they “ will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance” and that they are “not pre-committing to a particular rate path.” In light of its new forecasts, the ECB states its “updated assessment reconfirms that inflation should stabilise at the 2% target in the medium term.” The  brief statement also goes over their new projections, highlighting that the upward revision to their inflation path owes to a slower than expected deceleration in services inflation, with economic growth now seen stronger, mainly on the back of domestic demand.

For 2026, the ECB’s staff projects that headline and core inflation will average 1.9% and 2.2%, up from 1.7% and 1.9% in the September update, respectively, before easing to 1.8% (down from 1.9%) and 1.9% (up from 1.8%), respectively in 2027; both core and headline inflation are expected to average 2.0% in 2028. The higher core inflation trajectory (and to a lesser degree, the headline inflation path), mainly on wages-driven services inflation, prompted a decent jump in European yields, with economists and markets likely expecting little changed projections for prices growth. Nevertheless, it’s important to highlight that the boost to near/medium-term HICP forecasts still leaves headline inflation a touch below the 2% target in 2026 and 2027 and core inflation averaging roughly on-target across 2026 and 2027—and both come back to target in 2028.

The 0.2ppts revision higher to GDP growth forecasts in 2025 and 2026, to 1.4% and 1.2% respectively, and 0.1ppts to 1.4% in 2027 (also estimated for 2028) are relatively minor and subject to elevated uncertainty, with risks tilted to the downside, in our opinion namely due to ongoing headwinds associated with U.S. trade policy. These risks aside, we think the bar for additional easing remains high and it would take the U.S. reimposing higher tariffs on the E.U. for the ECB to mull additional rate cuts.

Lagarde’s comments during her press conference triggered a reversal of all the move higher in European yields and the EUR, as she struck a balanced tone on the path forward for rates that would point to a long on-hold stance rather than a higher likelihood of a hike rather than a cut. The ECB’s President also noted that there was no discussion of cuts or hikes today, and when asked about hawk Schnabel voicing comfort with marginal hike bets in markets Lagarde did not bite, reiterating that they do not have a set path for rates and cannot offer guidance due to elevated uncertainty. She did concede that “all optionalities should remain on the table,” but that would simply be on brand with having no pre-defined path. Regarding growth, Lagarde highlighted AI-related investment as surprising their GDP growth estimates to the upside, which softens somewhat the boost to forecasts had it instead been mainly on the back of stronger consumer spending. 

At writing, German 2yr yields are up only about 1bp versus pre-statement, falling by 2–3bps from the intraday peak after the statement, with similar moves in 10s that are flat on the day and compared to before the ECB’s decision dropped. End-2026 deposit rate expectations are sitting at around 3–4bps in implied hikes, also little changed compared to yesterday’s close. The EUR swung in similar fashion to yields and is sitting practically flat against the USD for the day.