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Holding Above Recent Lows

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BLOCK, Large 3Y Midcurve Put Condor

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  • The MNI Markets team thinks the most likely change to the sequencing guidance will be to remove the Bank Rate threshold altogether, and leave maximum flexibility to the MPC. This could be accompanied by verbal guidance that either the balance sheet will not begin to be unwound until after the Bank Rate is first raised or guidance that it unwinding could begin simultaneously. We think it is unlikely that the Bank would prefer to begin unwinding the balance sheet before raising the Bank Rate (although there are some sell side analysts who believe this will happen).
  • In terms of market reaction for these scenarios, we think that if the Bank was to confirm Bank Rate would be raised first there would be little reaction. If the Bank was to say that QT could happen ahead of a hike we would expect a rally across White/Green/Red short sterling futures with a steepening of the 2s10s gilt curve. The market would view this as implicitly pushing back the first hike. If the Bank was to say QT could happen simultaneously with the first hike, we would expect a similar move albeit much more muted (and potentially overridden by external factors).
  • Alternatively the Bank could set out a new threshold for when QT could begin. We think a 0.50% threshold is probably largely in line with market pricing. Anything higher than this would likely see gilts rally and the curve flatten as the prospect of QT is pushed out at least to 2023. A 0.25% could see some steepening of 2s10s as outlined above in the case of a simultaneous first hike with QT.