Goldman Expected Continued Flattening, Mark 2- & 5-Year Gilt Forecasts Higher

Late on Friday Goldman Sachs noted “the BoE delivered a 50bp hike against our and consensus expectations for 25bp. Although the MPC continued to point to future energy-related disinflation with no explicit forward guidance for future meetings, our economists now expect a 50bp hike in August and have revised their terminal rate forecast to 5.75%.”

• “We expect services inflation to remain sticky alongside elevated wage growth, with little obvious relief by the August meeting.”
• “The conspicuous flattening of the Gilt curve and stability in +10-Year Gilt yields on the day suggests further front-loading is likely to support these moves further.”
• “We revise our 2-Year Gilt and 5-Year forecast to 5.0% and 4.6% at year-end, from 4.4% and 4.3% previously. We leave our 10-Year Gilt forecast unchanged despite upside risks.”
• “Our expected terminal rate is still below market pricing, and with the UK Gilt market seemingly the source of substantial bearish shocks in recent weeks, we think this underperformance should slow as a result of BoE front-loading.”