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U.K. Investors Haven’t Yet Embraced BOE Message on Rate Rises

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Economy7 minutes ago (Nov 08, 2021 13:34)

© Reuters.

(Bloomberg) —

Investors haven’t yet fully embraced the Bank of England’s message on the likely speed of U.K. interest rate rises.

Financial markets are still pricing in the likelihood that rates will rise to about 1% by the end of next year, a level the central bank signaled would be too aggressive. While that’s a shallower path than before the decision, it’s still suggesting more rate hikes than policy makers indicated is likely.

The market’s response to the BOE’s remarks indicate the difficulty policy makers led by Governor Andrew Bailey have in communicating how they will pivot away from an era of massive stimulus toward one that’s more neutral or even a restraint on inflationary forces.

The BOE both wants to signal that it’s likely to raise borrowing costs in coming months and prevent runaway-speculation of a sharp tightening, which itself could hamper the pace of recovery. The U.K. central bank’s struggle mirrors the experience of the European Central Bank, which is attempting to convinced traders there’s no reason to expect any rate hikes next year.

The result has left analysts and investors guessing about when the BOE will order its first rate rise since the start of the pandemic to lift the key rate from a record low of 0.1%. One strategist who is taking notice is Agne Stengeryte, at Bank of America (NYSE:BAC) Global Research. 

“We have low conviction on the precise months of hikes but high conviction on the cumulative required hikes,” she wrote in a client note, recommending investors target the pace of rate hikes between May and November next year to slow from the current 34 basis points. Her colleague, economist Rob Wood, expects the BOE to raise rates to 0.5% by May and then again only in 2023. 

While Bailey has said it isn’t his job to steer markets, the bank set out forecasts last week showing a 1% rise in rates over the next year would leave inflation below the BOE’s target at the end of the forecast horizon, and falling further beyond that point as a result of spare capacity in the economy. That along with Bailey’s remarks are clear indications that BOE officials thinks an increase to 1% is more than is needed at the moment.

A second BOE scenario, factoring in futures pricing for energy that implies a rapid decline beyond the next six months, left inflation underneath the goal, suggesting even a more modest tightening outlook may still be too aggressive.

©2021 Bloomberg L.P.

U.K. Investors Haven’t Yet Embraced BOE Message on Rate Rises

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