Bank of England: the next rate hike is priced in but watch for QE news

Ahead of the Bank of England’s interest rate decision on Thursday, James Lynch, fixed income investment manager at Aegon Asset Management, comments:

“We expect the BoE to deliver a 25bps rise in policy rate which would take it to 0.50%, the second in a row of hikes after the December move. We also expect the balance sheet to be reduced by £28bn when they announce that the March 2022 bond they own redeems, and they will not re-invest the proceeds.

“The market already has four hikes of 25bps each firmly in place for 2022. As such we do not see much scope for the BoE to surprise on the rate path. The market has probably gone as far as it can.

“However, a surprise is more likely on the balance sheet reduction. We think the threshold has been met for another hike and stopping the reinvestments of maturing bonds in the portfolio. We would expect the logical next step is to prepare the roadmap for active selling of gilts.

“While it is too soon for the BoE to start selling gilts – they have already said they will wait until at least 1% bank rate first – we expect them to start the conversation about the operational feasibility of the reversal of QE. This may come in a statement in the 3rd Feb meeting.”

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