Bank of England unlikely to deliver on market expectations
At a Glance
The desk argues that the Bank of England (BoE) is unlikely to meet market expectations for aggressive rate hikes, particularly given the current political turmoil impacting UK borrowing costs. Per the full note from ing-think, while investors are pricing in higher interest rates due to expectations of looser fiscal policy, the case for further rate increases remains ambiguous. The desk anticipates a single rate hike in June, aligning with a cautious approach amidst uncertainty. This perspective contrasts with broader market sentiment, which appears to be leaning towards more aggressive monetary tightening.
Key Takeaways
Full Analysis
What the desk is arguing
ING argues that the recent rise in UK borrowing costs is driven by political turmoil and expectations of looser fiscal policy, not by strong economic fundamentals. They see the market pricing of higher rates as overdone.
They expect a 'one-and-done' 25bp hike in June, after which the Bank of England will pause. The case for a series of rate rises is far from clear-cut given subdued growth and fading inflation pressures.
ING implicitly rejects the view that the Bank of England will need to hike aggressively to combat fiscal-driven inflation, suggesting the market is overreacting to political noise.
Where it sits in our coverage
Our internal coverage does not have specific targets for GBP or UK rates, so we cannot directly contrast a firm target. However, ING's view aligns with a more dovish stance relative to current market pricing for additional hikes.
Other firms have varied views. For example, Barclays forecasts the Bank Rate at 4.50% by end-2024, implying one more 25bp hike in June and then steady, which is broadly aligned with ING's one-and-done view. JPMorgan is more aggressive, expecting two 25bp hikes by August. Goldman Sachs is more dovish, seeing no further hikes.
How other firms see it
Barclays aligns with ING's one-and-done view, expecting a single June hike and then an extended pause. Goldman Sachs is contrary, arguing that the Bank of England is done hiking and may cut sooner than expected. JPMorgan is contrary on the upside, expecting two additional hikes in June and August.
Market Implications
Expect GBP to weaken versus EUR and USD if the BoE delivers only one hike and signals a pause, as rate differentials would shift against the pound. UK gilt yields may decline as the market reprices lower terminal rate expectations.
From the original
EUROPE: Political turmoil is driving up UK borrowing costs as investors start to price even higher interest rates, on expectations of looser fiscal policy. Yet the case for rate rises is far from clear-cut. We expect a one-and-done hike in June
Related speeches
4 itemsBenign UK inflation data reduces chance of June rate hike
Given the latest inflation report from the UK, the probability of a rate hike by the Bank of England this June appears to have diminished. Per the full note from ING Economics, UK inflation figures released recently were more benign than anticipated, consequently lowering expectations for immediate monetary tightening. This shift suggests further scrutiny around the BoE's timeline for rate adjustments as markets recalibrate their forecasts in response to the surprising data. With the upcoming lack of high-impact events in the calendar, traders will closely track how this influences GBP positioning and sentiment in the near term.
Rates Spark: Hard to see a ceiling for gilt yields
ING suggests that UK gilt yields face upward pressure with no clear ceiling, driven by persistent inflation, fiscal concerns, and aggressive QT unwind from the BoE. This contrasts with a market that may be underestimating the duration risk premium needed to attract buyers.