Insights 
VT 
The Bank of England’s deputy governor, Sarah Breeden, spoke at a monetary policy hearing before the Treasury Committee. She stated that the disinflationary process in the UK is advancing steadily, with the economy gradually transitioning into excess supply.
Breeden expressed the necessity for future policy decisions to ensure inflation is progressing along the desired path. Tariffs are anticipated to have a minimal effect on the UK economy. Additionally, emerging slack in the labour market is expected to inform policy direction.
Consideration of Rate Cuts
Breeden noted there was previously a consideration to reduce the bank rate in May, even before any tariff impacts were apparent.
What Breeden argued, in fairly direct terms, is that inflation in the UK is now slowing at a reliable pace, reflecting how price pressures are unwinding across the wider economy. At the same time, the balance between supply and demand appears to be shifting, with output no longer pressing hard against capacity. Instead, we’re now seeing early signs of surplus supply—where the economy is making more than it immediately needs.
This shift may leave fewer constraints on output, reducing upward pressure on prices. It’s a position we’ve not seen for several years, as inflation and tight labour conditions dominated the outlook. For those of us focused on rate-sensitive instruments, Breeden’s comments serve as a clear indication that policymakers are willing to act even before data confirms every detail. The fact that they were discussing rate cuts as early as May, regardless of the potential noise from tariffs, speaks volumes about their current risk assessment.
While tariffs normally introduce cost-side complications, these were brushed off as likely to have a muted impact on inflation. That suggests pricing in any lasting push from import costs may be inappropriate. We should be careful not to overreact to headlines—it would be wise to keep focus on what the Bank sees as its key drivers, rather than react to temporary frictions.
Focus on Wage Dynamics
She also emphasised that developments in job market slack are now being viewed more precisely. This slack—essentially underused labour—feeds directly into wage dynamics. And with wage growth being a potent driver of core inflation, any softness there lends support to a looser policy setting.
As traders, we’re now faced with the likelihood that rate cuts will be considered not only sooner than expected but potentially in weaker conditions than previously assumed. This shifts the near-term rate path lower and flatter. Options positioning should reflect that change in bias, with forward curves being nudged gently downward. Any remaining conviction in higher rates, particularly through the front-end, risks being eroded rapidly if economic prints lean softer.
Pricing structures that continue to imply persistent inflation or a re-tightening bias within six months may need adjustment. The team weighing risk would do well to stress test any scenario where easing happens more than once, or at shorter intervals than currently implied.
Forward guidance remains implied rather than explicit. But the tone of Breeden’s testimony, especially the fact that easing was considered even before external shocks developed, tells us that the threshold for action is lower than some might expect.
Gilt vol should also not be ignored—particularly for shorter maturities. If the Bank begins to adjust faster, premium may start building into underlying rates risk as conviction in the policy path erodes.
In summary, when market signals begin to reinforce central commentary, strategies may need to be recalibrated. We’ve now been given a strong steer on where policy could head next, and remaining inflexible risks mispricing the shift. Adjusting curve exposure, particularly at the belly, should be a focus.
