Goldman: Haven’t We Been Here Before?

Goldman Sachs note that “recent data and commentary leave UK rate markets in a familiar set-up as we near the September MPC.”

• “On one hand, the data paints uneven progress on inflation, with only a very gradual softening of core service inflation and pay growth still exceptionally strong.”
• “Similarly, while the DMP survey suggests inflation expectations are well anchored, the recent GDP revision by the ONS also reinforces the view that UK activity is relatively resilient to the policy tightening implemented so far.”
• “On the other hand, BoE communication indicates the MPC clearly sees policy settings as restrictive, and an extended hold as a viable strategy to get inflation back to target.”
• “Our economists continue to expect more tightening, but the labour market and CPI reports leave plenty of room to impact near-dated meeting pricing (and duration).”
• “Beyond the front-end, the idiosyncratic component of UK rates has stabilized after the spring selloff.”
• “10y Gilt yields are around our year-end forecast, and as a result, we expect UK duration to trade around current levels, in a fairly wide range, but without a sustained trend.”