Count down to the BOE

After Wednesday’s mega UK inflation report, it’s worth looking at the latest Wirp chart (UK market-based interest rates). As you can see below, the market is pricing in a peak in UK interest rates just below 6%. The peak in rates is expected to come in March 2024, with no cuts in rates priced in until some time after Q2 2024. 

This means that the market is pricing in another 5 rate hikes from the BOE over the next 9 months. 

The market has only slightly increased its expectations of a 50bp rate hike today, and we think the BOE will stick to a 25bp rate rise. This BOE meeting does not include a press conference or updated forecasts, we need to wait until August for that, so the BOE will want to ensure that their statement delivers a clear message. 

The key things that I am watching for in the BOE statement include: 

- will they hike by 50bps or 25bps - we think 25bps, as 50bps could look like panic. 

- Will they signal that more rate hikes are to come and validate the markets expectations of 6 more rate hikes? They could do this by saying that the inflation outlook has darkened, or that future 50bp rate hikes aren't off the cards? This would be a hawkish outcome. 

- Will the BOE push back on market expectations for rate hikes, saying that May inflation is backward looking and the lead indicators for inflation are all pointing to lower price growth in the second half of the year? This would be a dovish outcome. 

- Will they give any hint that they could step in to support financial markets/ pension markets etc in this statement? 

- What sterling does in the aftermath of the BOE meeting. 

GBP/USD is fairly stable ahead of this BOE meeting, suggesting that FX traders are not yet too concerned about the surge in rate expectations or the outlook for UK growth. Some argued that as 2-year UK Gilt yields breached the 5% mark this week it would cause the pound to drop on the back of fears about UK growth. That still hasn't happened, which suggests that some of the increase in UK bond yields and UK interest rates are overdone. 

We will update you once we hear from the BOE. Good luck trading today.