Labour market key for BoE’s first rate hike

Highlights:

• In early August, the Bank of England’s (BoE) Monetary Policy Committee (MPC) judged that ‘some modest tightening of monetary policy over the forecast period was likely to be necessary’.
• While it sees inflation to temporarily spike to 4%, the ultimate reason for the BoE’s more hawkish policy approach is the labour market. Its recent strength could cause the Covid recovery-related inflation spike to become entrenched.
• Given the rather tough message of the BoE, we expect a first rate hike by 15 bps in August 2022, to be followed by another 25 bps key rate hike in Q2 2023. We anticipate the QE programme to end in December. According to the new BoE criteria, it will stop reinvesting maturing Gilts at Bank Rate of 0.5%, i.e. at the time of the second key rate hike.
• Notwithstanding the BoE’s more hawkish stance, we regard the currently priced first key rate hike for Q2 2022 as a little overdone and see only limited upside potential for short-dated yields. In contrast, long-dated UK Gilts appear vulnerable to the forthcoming end of Quantitative Easing and a bearish turn in global bond market sentiment.

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