Bank of England unlikely to deliver on market expectations
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01ING expects only one 25bp hike in June, contradicting market pricing of further tightening.
- 02Political turmoil, not strong fundamentals, is driving UK borrowing costs higher, in ING's view.
- 03The case for sustained rate rises is weak, and the BoE may pause after June.
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.
Risks to this view
Fiscal policy is looser than expected, forcing the BoE to hike more than once. Persistently high services inflation could also force further tightening. Downside risk: a deep recession could cause the BoE to cut rates earlier than ING expects.
Sources & References
How we cover this story