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Barclays: Look for 25bp Feb and May hikes, but risk is for 1% rate by May

BOE
  • “Expect another hike in February as well as passive QT thereafter” and look for unanimous vote.
  • Two key messages from February meeting:
  • 1.“Monetary policy has to tighten but likely not as much as the market thinks”
  • 2.“Risks are balanced and downside risks should not be overlooked”
  • “Our central expectation remains that the bank will hike in February (+25bp) and in May (+25bp) and then leave rates at 0.75% for the time being. In the meantime, passive QT (end of APF reinvestment) will test the impact of balance sheet reduction on the market as early as March”
  • Inflation forecasts: “likely 100bp higher in 2022” but “think that the Bank will continue to forecast inflation below target using market expectation and above target using constant rates”
  • “Dovish (and influential) members will clearly state that the quicker the pace of tightening, the lower the terminal rate. We would interpret this as another hike in May and status quo thereafter... More hawkish members will likely highlight that the risks to inflation are to the upside. Although these members may not reference active QT, their aim is probably to reach 1% on rates in order to be able to deliver active QT”
  • “We believe that a credible alternative risk is for the BoE to hike faster and more than we think. Hence, we think it is useful to consider a scenario in which Bank rate reaches 1% by May and the Bank engages into an active run down of its APF.”
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