Markets

COMMENT: BoE - 15bps lift-off & 25bps hike by end-2022

Credit: REUTERS/HANNAH MCKAY

Market pricing has moved significantly since the August BoE MPC meeting such that lift-off (15bps) and a further rate hike (25bps) are now fully priced.

By Divyang Shah

LONDON, Sep 15 (IFR) - Market pricing has moved significantly since the August BoE MPC meeting such that lift-off (15bps) and a further rate hike (25bps) are now fully priced. The chart below shows the probability of a 40bps hike which is priced fully by November. Within this pricing is a 15bps hike that is now 70% priced for the February meeting and more than fully priced for the May 2022 meeting. Currently the Bank Rate is at 0.10% which is why lift-off will most likely be a 15bps hike to allow 25bps increments for future hikes. 

Lift-off for February had been around 10% but got a boost following revelations last week that MPC members at the August meeting was evenly split on whether minimum conditions for lift-off had been met. Bailey told the Treasury Committee last week that the August meeting was unusual in that there were only eight members with the split "four-all".BoE rate expectations Sept 15.PNG

The newly appointed member Huw Pill (who is now the Chief Economist) is very likely to side with the hawks making it a 5-4 vote in favour of a rate hike. However, it seems likely that the BoE will wait until they have digested Q4 labour market data before making a shift to 1) make sure they have added information on how Covid will progress during the Winter months; and 2) gauge the impact of an ending of furlough related support and impact from Brexit.

Lift-off in February 2022 now seems the most probably outcome and we are adjusting our view from a hike in May 2022 to now the first hike happening at the February meeting. Once rates reach 0.50% the BoE, under its new sequencing guidance, will also start to entertain the prospect of ceasing to reinvest maturing assets. The chart below provides a profile of the maturity of gilts by year which for 2023 suggests roughly £33bn of gilts not being reinvested.

BoE gilt maturity.PNG

(Reporting by Divyang Shah)

((divyang.shah@refinitiv.com; @dshahTR))

(Reporting by Divyang Shah)

((divyang.shah@refinitiv.com; @dshahTR))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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