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Hybrid guidance

BOE
  • In our Bank of England review (see here), we noted the new “hybrid” guidance provided by the Bank – combining the “modest tightening” language of Aug/Sep/Dec would be required in the “coming months” – a phrase used in November (rather than “over the forecast horizon” used in Aug/Sep/Dec). We think what the Bank is trying to do here is convey that rate hikes will be more front-loaded i.e. “coming months” and rate hikes were not being anticipated “over the forecast period”. So, rate hikes after the “coming months” were not being viewed as appropriate.
  • However, the market has reacted more to the fact that four of the nine MPC members voted for a 50bp hike last week, and despite all of the attempts by the Bank to push back against medium-term market pricing, the money market curve has moved to priced in more than 4.5 further 25bp hikes in 2022.
  • Of course, the BOE (as with most economic forecasters) has considerably underestimated both the persistence and the magnitude of inflation. If this is to continue, the Bank would likely have to raise rates more than it currently anticipates.
  • However, based on the Bank’s inflation forecasts, it currently expects CPI to undershoot the target in three-years time with rates that peak at 1.40% in the middle of 2023, a level that would be surpassed by August 2022 on current market-pricing.
  • The MNI Markets team continues to look for 25bp hikes in both March and May, but we think that market is carried away here and market pricing is overdone for 2022 as a whole.
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