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Are we approaching r* - and will the BOE slow down?

GILTS
  • Gilts are outperforming Bunds and Treasuries this morning. Outside of the 2 1/2 hours following last week's MPC meeting, 10-year gilt yields are below 1.90% for the first time in May.
  • There is continued focus on politics ahead of the Queen's Speech today (which will actually be delivered by Prince Charles). Expectations are low on further support for helping households with the cost of living crisis so there is likely to be more focus on the Northern Ireland protocol. For more on that see the earlier comment from our political risk team here.
  • Yesterday external MPC member Saunders speech contained some interesting comments. He said that part of the reason he favoured 50bp rate hikes was that he was attempting to get Bank Rate back to neutral as quickly as possible (although he never considered a 75bp hike). He said that the danger of the BOE losing its inflation-fighting credibility outweighed his concerns about growth while rates were at an accommodative level. However, he also references estimates of the neutral rate being between 1.25-2.50%. With Bank Rate at 1.00%, that means to get to the lower bound of this range only one more 25bp hike would be required. We think that it is therefore by no means certain that Saunders will vote for another 50bp hike in June.
  • There was only a small reaction in money markets to this, but if other MPC members agree with Saunders' judgment of the range of neutral rates, the market path for rates looks increasingly implausible. This may be helping gilts move higher today (despite the moves being more in the belly than at the front-end).
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