BoE to hike over the coming months – TDS

The latest BoE’s MPC gave a clear signal to markets that they stand ready to increase interest rates should excess slack continue to erode, according to analysts at TDS.

Key Quotes

“The bar to hike is fairly low, with the MPC only needing to see economic conditions consistent with a rise in inflationary pressure, rather than an actual rise in inflationary pressure itself.”

“Change of View: We expect the Bank of England to hike Bank Rate 25bps in November, and again by May 2018, most likely at its February meeting. Beyond this, policy again reverts to “wait and see” mode as the MPC assesses the effects of Brexit uncertainty on the economy.”

“FX: The BoE looks like the next major central bank to join the convergence trade train, which is boosting cable and likely to offer it modest tailwinds in the very short-run. This reflects a shift in market positioning and valuation, with the former looking less stretched than the other convergence currencies like EUR, CAD, and SEK, increasing the risks that it overshoots in the near-term.”

“Rates: The hawkish reaction to the BOE’s meeting has led market to price in the probability of a 25bp rate hike as soon as 18 Q1 as compared to 19 H1 following the August BOE meeting. In terms of trades we continue to favour short sterling steepeners and maintain our bearish call on 10y Gilts.”