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View Change: Deutsche Bank look for terminal rate of 2.50% (from 1.75%)

BOE
  • DB looks for a 25bp hike in June "with at least three members on the committee looking for a bigger 50bps move. There's also a possibility of an even messier vote, with one or two members looking for no change to the Bank Rate."
  • DB now looks for 25bp at each meeting through February 2023, adding three 25bp hikes (it had previously looked for 25bp hikes in June, August and February).
  • "While our previous call had the Bank Rate peaking at 1.75% – within the range of neutral, which we broadly put at 1.25% to 2% – our updated call has Bank Rate going to 2.5%, beyond neutral and into modestly restrictive territory."
  • 5 reasons for the call change:
    1. "Near-term recession risks have receded meaningfully for us, given the Chancellor's recent boost to fiscal"
    2. "Inflation concerns remain elevated, and food inflation is now accelerating"
    3. "The labour market remains uncomfortably tight"
    4. "Our view of the economy is now materially better than that of the Bank's"
    5. "Global tightening skews risks towards more – not less – tightening from the BoE"
  • DB notes that it thinks "the more substantive tightening will likely deliver the necessary cooling in the labour market (and activity) to ultimately bring inflation down in the medium-term"
  • "Still maintain our view of rate cuts from late Q4-23"
  • DB "expect the MPC to stick to its May guidance of "some degree of further tightening in monetary policy may still be appropriate in the coming months" with "risks on both sides of that judgement and a range of views among these members on the balance of risks". The risk is that the latter statement gets watered down"
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