According to APP, Morgan Stanley has recently revised its forecast for the Bank of England's (BoE) monetary policy path. It now predicts the BoE will cut interest rates by 25 basis points each in April and November 2026, followed by another cut in February 2027, for a total of 50 basis points cuts for the year, with further slight easing expected the following year. Previously, Morgan Stanley's forecast was for rate cuts in March, July, and November 2026, totaling 75 basis points for the year. This adjustment reflects a market reassessment of the slower pace of the decline in UK inflation and the stronger-than-expected resilience of the economy.

Morgan Stanley's decision to move forward and reduce the number of rate cuts in 2026 is primarily based on the following macroeconomic assessments:
1. The path of inflation decline is becoming more gradual. Recent UK core CPI and wage growth rates show that they remain relatively sticky, while energy price volatility and the slowdown in service inflation are not as rapid as previously expected. Morgan Stanley believes that the Bank of England will maintain a restrictive policy stance for a longer period before achieving its 2% inflation target to avoid the risk of an inflation rebound caused by premature easing.
2. Economic resilience exceeded market expectations. The UK labor market remained relatively robust, with the unemployment rate remaining low, and consumption and investment activities showing some resilience. Although GDP growth slowed, there were no significant signs of a hard landing, which reduced the urgency for the Bank of England to implement large-scale easing ahead of schedule.
3. Impact of changes in the global macroeconomic environment: After the easing of geopolitical risks in the Middle East, international oil prices have fallen from their high levels, reducing imported inflationary pressures. However, at the same time, global central banks have generally become more cautious. The pace of interest rate cuts by the Federal Reserve and the European Central Bank may be slower than previously expected, and the Bank of England is unlikely to take a significant lead in easing. Otherwise, the pound sterling will face significant depreciation pressure.
4. The policy pace is becoming more "tight at the beginning and looser at the end".
Morgan Stanley postponed its first rate cut from March to April and cancelled the July cut, opting instead for two cuts in November and February of the following year, reflecting a "wait-and-see" approach. The total expected rate cuts for the year were lowered from 75 basis points to 50 basis points, reflecting a conservative revision to the Bank of England's overall easing stance.

The table below compares the key differences between Morgan Stanley's two forecasts (based on the latest report data):

Market Outlook <br />In the short term, the Bank of England's March policy meeting will be a key observation window. If March inflation data continues to show stickiness, the market's pricing of a rate cut in April may further decline from the current probability of around 60-70%, and the pound and UK government bond yields may strengthen in the short term. From a medium-term perspective, Morgan Stanley's adjustment is consistent with the mainstream market view: the Bank of England's easing measures for the whole year are likely to fall within the range of 50-75 basis points, and the pace is more likely to show a "wait-and-see" approach in the first half of the year and a gradual approach in the second half. Key data to watch include wage growth, core services inflation, and the revised quarterly GDP data, which will be the core factors determining whether rate cuts will occur as expected in April and November.
Risk Warning: Unexpectedly rising inflation or a renewed acceleration in wage growth could lead the Bank of England to postpone or even pause interest rate cuts. A significant slowdown in economic growth or a rapid deterioration in the labor market could force the Bank of England to return to a more aggressive easing path. A synchronized slowdown in the pace of easing by global central banks could put pressure on the pound, amplifying the risk of imported inflation in the UK.
Editor's Summary : Morgan Stanley's latest forecast indicates that the Bank of England will adopt a more cautious pace of interest rate cuts in 2026, reducing the total annual cut from 75 basis points to 50 basis points. The first rate cut will be postponed to April, and some easing measures will be delayed until February 2027. This adjustment reflects the combined effects of sticky inflation, economic resilience, and the global policy environment. The Bank of England is highly likely to adopt a "tight at the beginning, loose at the end" strategy. Investors should closely monitor inflation and labor force data for March and April.
Frequently Asked Questions
1. Question: Why did Morgan Stanley postpone the Bank of England's first interest rate cut from March to April?
A: The main reason is that recent UK inflation data, particularly core CPI and service inflation, have fallen more slowly than previously expected, and wage growth remains sluggish. Morgan Stanley believes the Bank of England needs to see more evidence to confirm that inflation is sustainably moving toward its 2% target, and to avoid a premature rate cut that could lead to an inflation rebound. Therefore, it has postponed the first easing window to April.
2. Question: Why was the July rate cut cancelled, reducing the total number of rate cuts for the year from 3 to 2?
A: The UK economy has shown strong resilience, with a robust labor market, no significant collapse in consumption and investment activity, and while GDP growth has slowed, it has not fallen into recession. Morgan Stanley believes that the Bank of England does not need to significantly accelerate easing in the middle of the year, and the cancellation of the July rate cut reflects a more cautious "wait-and-see + small steps" approach. A full-year 50 basis point adjustment is more in line with the current macroeconomic reality.
3. Question: What is the logic behind postponing some interest rate cuts to February 2027?
A: This reflects the policy path judgment of "tight at the beginning and loose at the end". Morgan Stanley expects inflationary pressures to persist in the first half of 2026, and the Bank of England will maintain a restrictive stance; in the second half of the year, as inflation further declines and the economy potentially slows down, room for easing will gradually open up. Therefore, some easing will be postponed to February of the following year, both to control inflation risks and to provide a buffer for growth.
4. Question: Following this adjustment, has the market's mainstream expectation for the Bank of England's annual interest rate cuts been revised downwards accordingly?
A: Yes, market pricing has become more conservative, with the mainstream expectation for a full-year rate cut falling within the 50-75 basis point range, largely consistent with Morgan Stanley's new forecast. Previously, some more aggressive views had significantly reduced the probability of easing by more than 100 basis points, reflecting the market's renewed acceptance of the Bank of England's "higher and longer" interest rate path.
5. Question: What data should investors focus on to determine the actual pace of the Bank of England's interest rate cuts?
A: The primary focus should be on the CPI data released in March and April (especially core CPI and service inflation), wage growth, and labor market data (such as changes in the unemployment rate and employment). Secondly, track the quarterly GDP revision and consumer confidence indicators. Simultaneously, pay attention to changes in the pound sterling exchange rate and the UK gilt yield curve, as these will directly influence the policy signals from the April interest rate meeting and the market's pricing in the probability of a rate cut in November. It is recommended to maintain a flexible position and respond dynamically to data verification results.