Goldman: All Quiet On The UK Data Front, Increasing Focus On BoE Balance Sheet

Goldman Sachs note that “with the recent inflation beat and upcoming election reducing the chance of a June BoE cut, and limited macro data until the second week of June, near-term directionality for UK yields will likely to be set globally rather than domestically.”

• “Focus has shifted to a potential tapering of BoE QT, as the MPC will need to decide in summer on the QT pace for the 12 months starting from October 2024.”
• “The thrust of MPC communication so far points to overall satisfaction with current QT parameters and market functioning.”
• “With respect to the path ahead, it is also clear that the BoE will aim for reduced Gilt holdings, especially if flexible liquidity injections through repos can effectively anchor money market rates to the Bank rate.”
• “However, the system-wide level of liquidity needed to keep financial stability risks at bay, remains uncertain.”
• “That suggests to us that while a continuation of active sales should be the base case, an adjustment to either the pace or the composition of runoff cannot be excluded and the BoE is likely to retain the optionality in the current statement to that effect”
• “We see risks tilted towards a friendlier outcome for GBP duration, either via a slower pace of sales or further skew away from long-end sales.”