BoE Pricing Twist Steepens, Markets Unwilling To Fully Price One Further Hike

As noted elsewhere, the BoE-dated OIS strip has twist steepened today, with the early hawkish drift higher in terminal policy rate pricing alongside the initial weakness in core global FI markets more than reversing.

• While the early move was clearly linked to an extension of the recent move higher in core global FI yields, the move in BoE-dated OIS then ran out of steam (as did the sell off in Gilts).
• One limiting factor may have been the market remaining unwilling to fully price in one further 25bp rate hike given the BoE’s most recent decision to leave its policy rate at unchanged levels, alongside a continued loosening in the labour market.
• Terminal policy rate pricing accordingly topped out around 23.5bp above prevailing levels.
• Nearer term, ~5.5bp of tightening is now showing for next month’s MPC decision, ~1.5bp below pre-CPI levels, with labour market dynamics and the apparent transient drivers of yesterday’s modestly higher-than-expected domestic CPI data helping keep that pricing in check.