BoE: Are market rate hike expectations still too low? - ING

For several meetings now, the BoE has signalled it thinks market's rate hike expectations are too low, but it was not really until the Bank's direct rate hike signal in September that markets really started to take note, according to analysts at ING.

Key Quotes

“Virtually pricing in a November hike, the market is now expecting an additional increase by next September.”

“So does the MPC still think that markets are underestimating future rate rises? The answer is probably yes. That's because, after September next year, markets only expect the Bank to hike once over the subsequent two years. We suspect the Bank would ideally like markets to have slightly more than this priced in, although, given all the various economic and political uncertainties, they may take a little more convincing.”

“But before then, the bigger question is whether or not the Bank throws in another explicit hint that rates need to rise further in "coming months". At this stage, we think the MPC will be reluctant to tie its hands too much. While we could potentially get some more positive Brexit news as we head into the new year - the concrete agreement of a transition deal and possibly the initiation of trade talks - there are still plenty of political hurdles and landmines that have to be navigated first. A lot can happen before February.”

“For sterling, this means we could see an asymmetric reaction to the four scenarios outlined above. Given that short GBP positions have been reversed of late, a more dovish Bank of England could see the pound fall more against the dollar than the euro. But on the flip side, a more hawkish BoE, one where there is a clear hint at another hike early next year, could see GBP rally more against the EUR than USD, because of the ECB's dovish forward guidance.”