BoE's Greene: Worth waiting before deciding on rate hikes
The desk believes the Bank of England (BoE) is likely to adopt a cautious approach regarding interest rate hikes, particularly in light of geopolitical tensions stemming from the US-Iran conflict. Per the full note source, BoE's Greene has indicated that while inflation risks are skewed to the upside, the current sluggish economy and loose labor market may mitigate the second-round effects of energy shocks. The market currently prices in a 42% chance of a rate hike in June, which suggests that upcoming economic data will be pivotal in shaping expectations ahead of the meeting.
What the desk is arguing
The desk posits that the BoE is inclined to wait before making any decisions on interest rate hikes, especially given the uncertainties surrounding the US-Iran war. Greene's previous hawkish stance contrasts with her current neutrality, as she weighs the potential economic fallout from geopolitical developments.
Evidence from the market indicates a 42% probability of a rate hike in June, with traders closely monitoring upcoming UK economic data to inform their positions. The market is also pricing in a total of 58 basis points of tightening by year-end, underscoring the importance of both domestic data and international events in shaping BoE policy.
Where it sits in our coverage
Our consensus target for GBP/USD is 1.075, with a range between 1.04 and 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with jpmorgan, which anticipates a gradual tightening cycle, while diverging from bofa, which remains more cautious about rate hikes. The desk's call sits at the upper bound of the consensus range, reflecting a more optimistic outlook on potential rate increases.
How other firms see it
Firms like jpmorgan and citi are aligned with the desk's cautious optimism regarding rate hikes, emphasizing the need for a careful assessment of economic conditions before acting. Conversely, bofa and deutsche express skepticism about the timing of rate increases, citing concerns over economic growth and inflation persistence.
Key currency pairs to watch include GBP/USD, which is directly influenced by BoE decisions, and EUR/GBP, as shifts in interest rate expectations could also impact the Eurozone's monetary policy outlook.
Key takeaways
- 01BoE's Greene advocates for a cautious approach to rate hikes amid geopolitical tensions.
- 02Market pricing indicates a 42% chance of a rate hike in June, contingent on upcoming data.
- 03Inflation risks remain elevated, but the sluggish economy may limit second-round effects.
- 04The market anticipates a total of 58 bps of tightening by year-end.
Market implications
Traders should monitor the upcoming UK economic data releases closely, as these will likely influence the market's perception of the BoE's rate hike trajectory. A significant shift in inflation data could alter the current 42% probability of a June rate hike.
It's worth waiting to see how the US-Iran war develops before deciding whether to hike interest rates Inflation risks are skewed entirely to the upside Sluggish economy and loose labour market should limit second-round effects from energy shock BoE's Greene has been one of the most hawkish members in the MPC for a while as she kept warning on upside inflation risks even before the US-Iran war started. More recently, she's been curiously neutral despite the energy shock adding to the upside inflation risk argument. In fact, she preferred keeping rates steady because in her view, the sluggish economy and loose labour market should limit second-round effects.
She's mindful that a rate hike now could prove to be a policy error if the war leads to a severe global demand shock. She suggests that waiting until the impacts from the war are clearer would be better at this point. She remains concerned though that while headline inflation has dropped from its historic peaks, the "last mile" to the 2% target for core inflation remains the hardest.
She has frequently pointed to services inflation and elevated wage growth as signs that domestic price pressures are not yet defeated. The next policy meeting is in June and we will get more UK data before that. The market is pricing a 42% chance of a rate hike in June, so the data should sway the probabilities one way or the other.
It goes without saying that US-Iran developments will also be key for interest rate expectations. The market is pricing in a total of 58 bps of tightening by year-end. This article was written by Giuseppe Dellamotta at investinglive.com.
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