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Citi: Feb and May hikes before pausing

BOE
  • “Expect a 25 bps hike [through an unanimous vote], the beginning of passive QT and potentially more hawkish near-term guidance. Our bias remains towards a rapid but ultimately limited monetary tightening in H1-2022.”
  • “We think active Gilt sales are relatively unlikely in 2022 – with a faster rate hiking cycle required to pass the 1% threshold likely to ferment fears of undue market volatility. We expect a further hike in May, with the MPC on hold through the latter part of the year as demand slows and inflation fears recede.”
  • “Expect CPI [at market rates] returning to levels just marginally below target in the first quarter of 2025. A margin of spare capacity is also likely to emerge by the end of the forecast, suggesting a further fall in inflation beyond the horizon.” At constant rates, Citi looks for CPI at 2.8% at the end of the forecast horizon.
  • “A hike of 50bps cannot be entirely ruled out. However, we continue to think it more likely the MPC opt for more consecutive moves – with a larger single move risking the appearance of a loss of control as well as unnecessarily alerting markets to a risk of imminent bond sales.”
  • “Our base case is a re-introduction of some guidance pointing to the removal of stimulus ‘over the coming months’ while also re-affirming existing medium term guidance suggesting only a limited scope to hike rates.”
  • “A hike is possible in March, though we think it more likely the MPC choose to hold off – in part owing to uncertainty over the impact of the first tranche of passive QT. If the government drop the NIC hike, or offers a very large package of household support with energy costs, risks here could rise, however. A third hike – in either June or August – also remains plausible depending on the MPC’s communications next week.”
  • “The MPC may also conclude it has every interest in dragging its feet in an effort to avoid unnecessary volatility. We expect any review into active sales to follow a similar process as that for negative rates – with a protracted consultation on both the impact and administration of any sales before these are deemed feasible.”
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