STIR: Mizuho Look Ahead to BoE & Implications For Gilts/SONIA

Ahead of the week’s BoE decision Mizuho note that they “expect the BoE to keep their policy rate unchanged at 5.25%. Macro developments since the December meeting have been mixed and, while inflation progress has been better than the MPC expected, services and core inflation remain sticky. Wage growth has decelerated, but only modestly.”

• “The unexpected CPI progress will likely translate to a dovish shift in the vote split - we see risk of a three-way split. However, we also think that the BoE will likely prefer to keep their optionality open – we expect forward guidance to remain unchanged.”
• “We think it’s too early to say that the current sell-off in Gilts is over. There is still risk that the coming CPI figures show slower progress. On top of that, we see risk that a mixed message from the BoE may support a pick-up in UK rates vol, making the SONIA strip relatively more vulnerable to markets pushing out rate cuts and pressuring front-end UK rates higher in the near term.”
• “Having said that, the appetite to add UK duration on dips seems strong. We would use any cheapening of 10Y Gilts to buy; 4.0% has been a well-respected support. We expect to see a strong buying appetite into Q2-24, when a big deceleration in CPI is expected.”
• “This may also be coupled with the BoE shifting to an even-more dovish stance, putting an end to the Santa-rally correction and ensuring another spell of bull-steepening of the curve.”