|Ahead of the June Bank of England Meeting announcement expected at midday today, the question on wealth managers’ mind is whether the Bank of England will hike by 25bps or 50bps? Analysis By Michael Siviter, Senior Portfolio Manager – Invesco Fixed Income
It is almost certain the Bank of England (“BoE”) will raise base rate at the June meeting, the debate for the market is around whether policymakers will hike 25bps or choose to accelerate the tightening pace by hiking 50bps. Despite higher than expected inflation data this week we still believe the majority of MPC members will favour a 25bps hike, with only one or two members voting for a 50bps move, mostly likely Catherine Mann and/or Jonathan Haskel.
The MPC will be cautious about accelerating the pace of tightening as it could cause an excess tightening of financial conditions. It is important to recognize that the market has raised expectations for the terminal rate from 4.4% at the time of the BoE’s May forecasts to 6%. A 50bps move would surprise consensus expectations leading to a potentially volatile repricing, as the market adjusts probabilities to incorporate a faster hiking pace.
Policymakers are mindful that there is considerable policy tightening in the pipeline already as fixed rate mortgages struck in 2020 and 2021 refix to higher rates. The next 3 months will see a particularly large number of mortgages resetting.
It is also not clear that the BoE’s credibility is being challenged in a way that will justify an accelerated pace of hikes. Market and survey based measures of inflation expectations have remained contained, and a number of forward looking measures of pricing intentions have moderated.
Lastly, it is worth noting the June meeting does not have a scheduled press conference, so policymakers will have few opportunities to nuance the message and guide markets. The less risky path for the BoE is to continue hiking 25bps until inflation moderates.
Will the Bank of England adjust its forward guidance?
It is possible that the BoE will want to send a more hawkish message in its forward guidance by reintroducing language used earlier in the year to hint at the possibility of faster hikes if inflation remains persistent. MPC members might also want to point to the August meetings, when new forecasts will be presented, as a natural point for a bigger reassessment of policy. The advantage being that the August meeting will be followed by a press conference.
UK interest rate markets have seen a dramatic repricing over the last two months on both an absolute and relative basis to developed market peers. The market is now pricing for base rate to peak at close to 6% later this year and remain above 4% for the next 4-years. While higher than forecast inflation and wage data justified part of this re-pricing, we believe the current rate path represents a substantial headwind for the economy, which will ultimately weigh on inflation pressures. As a result, we see the higher yields now available on UK gilts and sterling corporate bonds attractive on an outright basis as well as versus their European and US equivalents.