We anticipate , however the more and more cautious language from Financial institution of England officers and a possible progress downgrade subsequent Thursday means that markets are overestimating the quantity of tightening for the remainder of this 12 months. Our view is that the Financial institution will hike once more in June earlier than pushing the pause button from the summer time.
The Financial institution of England sits someplace between the Fed and the ECB with regards to tightening financial coverage. As Governor Bailey himself emphasised week earlier than final, the UK progress story is way nearer to that of Europe, not least due to Britain’s reliance on as a supply of electrical energy.
Then once more current counsel the story has larger similarities to that of the US, the place labor shortages are placing ever-increasing stress on pay—albeit the UK’s expertise appears much less excessive.
And it’s that latter driver—coupled with some very hawkish language on the tail-end of final 12 months—that has led markets to cost in a tightening cycle that’s a lot nearer to that of the Fed than the ECB. Buyers anticipate roughly six extra hikes this 12 months.
However that’s getting more and more troublesome to see occurring. Our personal view is that the Financial institution will hike subsequent Thursday and once more in June, however is extra prone to then hold-fire for the remainder of the 12 months.
Count on that extra gradual message to be bolstered on the Financial institution’s assembly on Thursday.
Listed below are 4 issues we anticipate:
How the UK compares to the US and Eurozone on progress and inflation
1. Another 25bp rate hike is more likely than a 50bp move
The Bank has hiked three times so far and a fourth increase next Thursday looks like a near-certainty. The bigger question is whether the BoE opts for another 25 basis-point (bp) move, or whether it follows the Fed and goes for 50bp. At one point last week markets were pricing it as 50:50 either way.
Still, we think 50bp is unlikely. Governor Bailey recently said the Bank is walking a ‘narrow path’ between growth and inflation, and implied that the Bank was comfortable with taking a more phased approach to tightening.
Of course, the BoE is at a slight advantage to some other central banks in that it already has a few hikes under its belt.
And while fellow committee member Catherine Mann didn’t close the door to faster tightening in a recent speech, she implied that much would depend on how quickly the consumer story deteriorated.
It’s still early days, but last week’s plunge in consumer confidence and second-consecutive fall in suggest caution.
The Sonia swap curve is still pricing an unrealistic path for the Bank Rate
Source: Refinitiv, ING
2. New forecasts set to reveal more pronounced growth-inflation trade-off
Even before the war in Ukraine, the Bank was expecting with a bleak growth outlook. New forecasts due next week are likely to show that this trade-off has only magnified since.
Energy prices are higher—and remember that the BoE assumes gas prices stay flat beyond six months in its projections, so the new inflation numbers will ignore the fact that futures prices edge lower beyond next winter.
Meanwhile, markets expect the Bank to hike rates to roughly 2.5% over the next year, which amounts to roughly 100bp more tightening priced in than before the February meeting.
The net result is likely to be an inflation forecast that peaks around 9% in April and stays not far below that throughout 2022, and an economic outlook that features at least one quarter of negative growth this year. Like February, we also expect the BoE to project a rise in over coming years.
If we’re right, then this should be read as a hint that market pricing has become too aggressive and investors should prime themselves for fewer rate hikes.
Our 4 scenarios for the May BoE meeting
3. Watch out for signs the committee becomes more divided
Ever since the Bank began hiking late-last year, we’ve felt that the committee would probably become more divided on the need for further tightening as Bank rates ratcheted higher.
That theory looked severely misplaced after four out of nine committee members voted for a 50bp hike back in February. But since then, we saw one official—Jon Cunliffe—vote for no change in rates at the March meeting, explaining subsequently that he was less fazed than others by the rise in consumer inflation expectations.
We suspect the coming week’s vote split will be 8-1 again in favor of a hike, but if the dissent becomes more widespread then that would be another hint to markets that the rate hike cycle could be nearing a pause.
4. Bank to offer new guidance on QT but stop short of starting gilt sales
The Bank kick-started its quantitative tightening (QT) process back in February, and has previously signaled that this could be accelerated by actively selling government bonds back into the market.
We recently argued that the rise in market volatility suggests now is not an opportune moment for the Bank to start doing this. And instead, we simply expect to get some further details on how such a policy could work in practice, not least the mechanics of how the sales might be conducted.
Assuming market conditions improve, there’s still a fair chance the Bank will start selling bonds within 9-12 months. Without sales, the BoE’s balance sheet is going to decline at a very slow pace.
Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more