- The Bank of England (BoE) surprised markets and analysts by hiking policy rates by 50bp, bringing the Bank Rate to 5.00%.
- We view the 50bp hike as front-loaded in nature with wage growth and inflation having surprised to the topside. We pencil in 25bp rate hikes in August and September. This would mark a peak in the Bank Rate of 5.50%
- We increasingly see relative rates as a positive for EUR/GBP from here, which is one of several reasons behind our fundamental predisposition of buying EUR/GBP dips.
The Bank of England (BoE) hiked the Bank Rate (key policy rate) by 50bp to 5.00% with 7 members voting for a 50bp hike and two members voting for unchanged.
The majority of the Monetary Policy Committee (MPC) voted for an increase of 50bp as recent data releases have indicated more inflation persistence amid still elevated inflation expectations. Consequently, the MPC judges risks to inflation to be “skewed significantly to the upside“. The BoE repeated that “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required” but refrained from including “forceful tightening” which previously has been used as a phrase in BoE’s forward guidance.
We largely see the 50bp hike today as frontloading of further tightening and note the phrase: “0.5 percentage point increase in interest rates was required at this particular meeting.” We think that the BoE will return to a smaller 25bp hike at the August meeting if data does not surprise significantly to the upside. However, we stress that risks are skewed to the topside.
With both the global backdrop, inflation and wage growth having surprised to the topside, we do not believe that data will have weakened enough for the BoE to pause its hiking cycle at the September meeting. We thus revise our forecast to include a 25bp hike in September, marking a peak in the Bank Rate at 5.50%. Before the next meeting on 3 August, we get both another job market report (11 July) and inflation data (19 July) for June. As the key concern for the BoE remains developments in wage data as well as service inflation this is the key data releases to follow.
Rates. Despite the 50bp surprise, 2Y gilts yields have remain relatively steady as pricing in White and Red FRAs have adjusted to the front-loaded hike today. 10Y gilts yields on the other hand have dropped c. 10bp. Markets are pricing in 42bp for the August meeting.
FX. EUR/GBP initially moved lower but fully retraced the move within the hour. On balance, we continue to see relative rates as a positive for EUR/GBP from here, which is one of several reasons behind our fundamental predisposition of buying EUR/GBP dips. We highlight that whether the aggressive BoE market pricing will subside or inflation continues to surprise, we see it as headwinds for GBP. We still like our short GBP/CHF trade recommendation.
Our call. We continue to expect a 25bp at the August meeting although it is a close call between 25bp and 50bp. In order for BoE to opt for 50bp instead of 25bp we believe that we would have to see data releases prove considerably stronger than what we currently pencil in. Our call is considerably less than current market pricing 100bp until February 2024). We still believe that the first rate cuts will not be delivered before Q2 2024.
 hiked the Bank Rate (key policy rate) by 50bp to 5.00% with 7 members voting for a 50bp hike and two members voting for unchanged.){kind=link}