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Tomorrow we have the Bank of England meeting for the first time since they raised interest rates back in December. The market is pricing in a high probability of a 0.25% interest rate hike. If realized, this would be the first back-to-back rate hike since 2004 for the monetary policy committee (MPC). With volatility expected, here are a few of the main things we’ll be keeping an eye on tomorrow.

Future rate expectations

The main point that we think markets will react to is the future rate expectations. Various analysts at top banks are forecasting for three or even four rate hikes in 2022. This would put the base rate around 1% come December. 

If the MPC give an indication that this is the flight path that they are going for, we’ll see different reactions from asset classes. The FTSE 100 and FTSE 250 will likely fall on this news. Higher rates is a negative for most major companies. this is because it increases the cost of issuing new debt, at higher prevailing market rates. Further, higher base rates makes it more likely for consumers to save rather than spend. This would dampen demand for sectors that rely on consumer discretionary spending.

In FX, we think the reaction would be more muted. One of the reasons for the strength in GBP over the past month or so (take a look at GBPEUR moving above 1.2000), is that traders have been pricing in higher rate expectations. Therefore, with the consensus of a hike tomorrow, we don’t think GBP will actually rally much against the USD or EUR. Only if we see a bullish commentary from Governor Bailey do we think that GBP has meaningful upside.

Is a Feb hike a done deal?

The second point worth focusing on is taking a step back and assessing if the bank will actually hike. Back in November, the market expected a hike, only to be disappointed. This saw a selloff in banking stocks in particular. 

So there is a small chance (we’d say 5-10%), that the BoE don’t raise rates tomorrow. This would see equity markets shoot higher, and GBP move lower. In this case, although we wouldn’t short equities, we would look to buy GBP. After all, even if the bank don’t hike tomorrow, the pressure to stem inflation will mean that future hikes are coming, it’s just a matter of time.

The state of the economy

Finally, we’ll be focusing on what the central bank comments on regarding the state of the UK economy. Do they expect future growth forecasts to be upgraded? Is inflation on plan to move lower in the spring? these and other questions will hopefully get clarified.

This will drive markets more from a sentiment point of view. If the overall rhetoric is upbeat, then this bodes well for UK assets in general. The flipside of this is also true. 

Overall, we expect the BoE to hike rates tomorrow by 25bps and offer a hawkish commentary.

3 thoughts on “3 Things To Watch For At The Bank of England Meeting Tomorrow”
  1. […] As expected, the Bank of England raised interest rates this afternoon by 0.25%. This puts the benchmark rate at 0.5%. Of interest was the fact that four members actually voted for a 0.5% increase, showing the hawkish sentiment that is in the central bank at the moment. […]

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