GBP Money Markets: Bank of England is supporting liquidity
The desk believes that the Bank of England's liquidity support will stabilize money markets, ultimately leading to lower terminal rate expectations. The commentary notes that while bank reserves are stable, allowing for a healthy liquidity environment, market pricing is still too aggressive on future rate hikes, with only about 20 basis points anticipated this year. Per the full note source, considering the recent shift in market sentiment due to declining oil prices, the desk argues for positioning further out the curve as inflationary pressures are expected to ease by 2027.
What the desk is arguing
The desk posits that strong liquidity support from the Bank of England will enhance market stability and bring down rate expectations over the medium term. Despite a volatile environment, stable reserves, bolstered by the BoE's liquidity facilities, are currently aiding market conditions. This is evidenced by the Short-Term Repo uptake, which saw an increase to £134 billion, nearly double the amount from a year ago.
Moreover, the desk highlights the market's mispricing of the terminal rate, suggesting that further tightening beyond current levels is unlikely. With the inflation outlook softening and market only pricing in modest hikes, the desk recommends focusing on longer-term positions as the Bank of England may cut rates down to 3.25% by 2027.
Where it sits in our coverage
Our consensus target for GBP/USD stands at 1.3500, with a range from 1.2400 to 1.3800. This aligns closely with targets from several firms, including: - citi: Dec26 target at 1.2400 - commerzbank: Dec26 target at 1.4020 - scotiabank: Dec26 target at 1.3800
The desk's positioning aligns with the upper range of market views, suggesting an optimistic outlook compared to peers like nomura and goldman, who forecast lower targets by Dec26.
How other firms see it
Several firms share an optimistic stance on GBP, including hsbc and morganstanley, both expecting targets around 1.35 by Mar26. Conversely, firms like citi and nomura have issued more conservative assessments, indicating skepticism about reaching the higher targets suggested by the desk's outlook.
This environment necessitates close monitoring of related currency pairs, especially EUR/USD, since the trajectory there may also reflect shifts in BoE policy, influencing GBP's performance.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Bank of England's liquidity measures are stabilizing money markets.
- 02Market pricing of future rate hikes appears overly aggressive, with expectation of only 20bps in hikes this year.
- 03Shifts in oil prices are influencing a more dovish sentiment, impacting future monetary policy.
- 04The desk advocates for longer-term positioning given expected easing in inflation pressures by 2027.
Market implications
Traders should watch the recent uptick in GBP/USD around 1.3500, as market sentiment shifts could pivot directionally based on BoE communications. With no imminent high-impact events, next moves in this currency pair may hinge on inflation data that could impact rate expectations.
Risks to this view
A sudden resurgence in inflation could reverse the current dovish tone, compelling the Bank of England to reconsider its rates. Additionally, any geopolitical shocks leading to higher oil prices could similarly re-ignite inflation fears, destabilizing the current market conditions.
GBP/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Goldman Sachs | — | 1.3600 |
Commerzbank | — | 1.4020 |
UOB | — | 1.3410 |
All 21 desk targets for GBP/USD
Articles GBP Money Markets: Bank of England is supporting liquidity 14:20 Rates United Kingdom Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Liquidity conditions look very healthy, and stable bank reserves are helping money markets. We think the terminal rate priced in by markets is too high and prefer positioning further out the curve. Tweaks to the Discount Window Facility increase the system's resilience against liquidity shocks Michiel Tukker Stable reserves – thanks to the Bank of England's liquidity facilities – are supporting money market conditions High Bank of England terminal rate favours terming out Money market curves are still positioned for a Bank of England hike later this year, but the sharp decline in oil prices has turned sentiment more dovish.
Only around 20bp of hikes are priced in for this year, and this could still go lower once the risks of second-round inflation effects are better understood. Whilst we still acknowledge the chance of another hike, we disagree with markets’ perceived terminal rate of 4%. We expect price pressures to ease in 2027, allowing the BoE to cut the policy rate to 3.25%.
As such, we see more value further out the curve. We think markets are pricing in a too high terminal Bank Rate Liquidity conditions benefit from stable reserves Despite the increased volatility in rates, liquidity conditions have remained very healthy. Overall bank reserves have actually increased thanks to a strong pickup in the Bank of England’s liquidity facilities.
The uptake of the Short-Term Repo (STR) increased to £134bn, almost double that in July last year. Pickup in BoE liquidity facilities helped reserves stabilise for now Source: ING, Bank of England, Macrobond "> Source: ING, Bank of England, Macrobond We’ve previously signalled that the upward pressure on gilt yields might trigger a review of the Bank of England’s pace of quantitative tightening in September. Right now, the BoE targets £70bn of unwinding annually, which, all else equal, would reduce reserves by a similar amount.
If this number gets reduced to say £50bn, the withdrawal of bank reserves from the system would proceed at a slower pace. In effect, this would further support liquidity conditions going forward. Overnight deposit rates are comfortable at current levels SONIA is now trading at just 2bp below the Bank Rate and could remain there for longer.
The Bank Rate provides a soft ceiling which limits further upside. Around 25% of banks are now offering the Bank Rate for attracting deposits, but we also see around 10% of banks offering around 5bp below the Bank Rate. As reserves stay around current levels, we shouldn’t see much movement in the pricing of SONIA.
Having said that, in the future, banks could start paying more than the Bank Rate to attract reserves. SONIA is based on unsecured borrowing between financial institutions. In contrast, obtaining liquidity from the Bank of England facilities requires collateral.
The Short Term Repo facility, for example, requires high-quality collateral like gilts. So even though the STR is priced at the Bank Rate, obtaining funding through the market might still be preferred when possible. SONIA seems comfortable around 2bp below the Bank Rate The system is made more resilient against unexpected liquidity shocks The Bank of England’s efforts to keep liquidity risks to a minimum are also reflected in the latest tweaks to the Discount Window Facility.
In contrast to the STR and ILTR, this window also allows for intra-week and intra-day liquidity. To discourage structural use, the Bank of England sets the pricing of this facility at a relatively high spread versus the Bank Rate. But the latest changes have reduced this premium.
Where initially the facility would cost up to 150bp above the Bank Rate (for lowest collateral quality), this has been reduced to just 50bp. For the highest level of collateral quality, the spread is now just 15bp. In effect, the Bank of England has strengthened the system against unexpected liquidity shocks.
The new pricing of the DWF is less punitive than before, which should hopefully also reduce the stigma surrounding its use. These changes are also in line with the broader strategy to make central bank liquidity a more integral part of banks’ liquidity planning. Easier and cheaper access to BoE liquidity allows banks to operate at lower reserve levels.
Bank of England Content 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 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Michiel Tukker Senior UK & Eurozone Rates Strategist Michiel Tukker is a Senior UK & Eurozone Rates Strategist based in London.
Before ING, he worked as a quantitative economist for the Dutch central bank, at BlackRock in its Financial Markets… In this article High Bank of England terminal rate favours terming out Liquidity conditions benefit from stable reserves Overnight deposit rates are comfortable at current levels The system is made more resilient against unexpected liquidity shocks
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