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Policy decision / MPR / Minutes due Thursday

BOE
  • Markets are almost fully priced for a 25bp hike while all 23 sell side reports we have seen expect a 25bp hike (while only Santander and Swiss Life IM look for an on hold decision in the Bloomberg survey out of 37 submissions).
  • Our full BOE preview will be published early this week but we note that assuming the MPC votes for a 25bp hike, it will almost certainly not reinvest the gilt holdings due to mature in March. This is largely expected by markets, but there are a couple of sell-side notes that caution that there may be a delay.
  • The main focus will be on the medium-term outlook. Will the Bank push back against market rate expectations of 4.75 hikes in 2022? The easiest way to subtly do this would be for the inflation forecast at market rates to be below 2% at the forecast horizon. This seems the most likely scenario to us. Of course the Bank could be more explicit in its comments, but there seems little to gain from doing that when a steeper money market curve at this point in time will help the Bank’s inflation fighting credentials (particularly as the Bank’s previous communications have not particularly steered the market in the desired way).
  • The Bank could alternatively point to two-way risks to the inflation outlook, which would mean that even if the inflation forecast was below 2%, market participants could still think that there was scope for the BOE to carry out tightening at the pace the market currently prices.
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