A 25 basis point hike is fully priced at this stage and traders will be looking for clues as to what the BoE will do next in the coming months. Soaring inflationary pressures have not made their job any easier, and with the economy devastated by the cost of living crisis, the task at hand is only made more difficult.
That said, the market still has some confidence that a rate hike will have more of an effect. Looking at the pricing here, we can see that BOE’s terminal rate is near 5.00% (he’s currently 4.91%). This suggests at least two more rate hikes in a row, including today, and more or less another rate hike is somewhat priced in at the moment.
So what’s the play here?
Essentially, this might look like the peak of BOE’s hawkishness. That is, the market wants him to reach 5.00% interest rate. There is a little more room for pricing beyond this, but all of this means central banks are more likely to be disappointed in the coming months.
If policymakers are not convinced today, it will only add to the technical burden on the pound this week. GBP/USD has already pulled back after testing 1-year highs around 1.2660-66, and a more dovish shift in BOE pricing could rock the pound .
Bailey & Company, I think. At least play as sparingly as possible and try to keep the door open for more aggressive moves. But they may have to acknowledge the fact that reality will eventually catch up with them and the room for further tightening is starting to close.
In other words, they don’t want to risk further reputational damage from policy missteps and a hard landing in the economy due to excessively tight credit and financial conditions next year. In an already weak outlook overall, this is a serious risk to consider.
Still, today’s decision could work for both sides. There are certain quarters in the market where we hope the BOE will eventually take a more dovish stance.