UK: Higher yields and two BoE rate hikes - Danske Bank

Analysts from Danske Bank, forecast higher UK yields across the board as the Bank of England heads for a rate hike in May and probably another in November. 

Key Quotes: 

“Despite UK data have weakened in Q1, we still believe the Bank of England is raising the Bank Rate to 0.75% at its meeting in May. We still expect another hike in November taking the Bank Rate to 1.00% by the end of the year, but the timing and pace of future rate hikes is merely a function of GBP appreciation/depreciation, energy prices and wage growth. If the trade conflict escalates into a full-blown trade war (not our base case), the Bank of England would likely be forced to postpone further hikes.”

“Our expectations of a ‘two hikes per year hiking cycle’ is more hawkish than consensus expectations and more hawkish than the market’s pricing. The market is now pricing in approximately 70% probability of a rate hike in May (18bp priced) while two full 25bp rate hikes are priced in around summer 2019. However, given the high economic and political uncertainty in relation to Brexit, we expect the market’s pricing to remain somewhat behind the curve, which was also the case in the US when the Fed started its hiking cycle.”

“We generally forecast higher yields across the curve and with the BoE expected to lift the front end much faster than the market’s pricing, we look for a gradual flattening of the 2- 10 and 5-10 yield curves. We forecast yields on 2Y gilt at 1.40% in 12M and target yields on 10Y gilts at 2.00%”.