Key takeaways
We expect the Bank of England (BoE) will hike the Bank Rate by 25bp to 0.50% on Thursday.
We expect the BoE will repeat that “some modest tightening of monetary policy […] is likely to be necessary”, which we would interpret as a small pushback to current market pricing. A removal would be a hawkish signal, in our view.
The BoE will announce the beginning of “passive QT” (ceasing of reinvestments) in connection with the meeting if we are right about the hike. BoE is expected to start “active QT” (actively selling bonds to markets) when the Bank Rate reaches 1.00%.
We still expect two further hikes this year (May and November). Hence, the BoE is likely to announce “active QT” in connection with the November meeting. Risks are skewed towards more hikes than we have pencilled in.
Markets are pricing in nearly five rate hikes. Hence, we also see a higher probability of a dovish surprise than the other way around.
FX: We still think 0.83 is the bottom for EUR/GBP and seeing a case for a slight move higher to 0.84 in 12M in case the BoE is not as hawkish as currently priced.
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