Bank of England preview: an unconvincing pause is in the cards. Bank of England preview: an unconvincing pause is in the cards. Bank of England preview: an unconvincing pause is in the cards.

Bank of England preview: an unconvincing pause is in the cards.

Bonds
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  The BOE is on the verge of losing its credibility as it tightened the economy too little, too slowly. At this week's MPC meeting, Bailey will need to hide behind the higher-for-longer message as inflation is becoming more entrenched, but policymakers keep interest rates on hold as they worry about the economy. UK Gilts are poised to align with the prevailing global direction or rising yields, with 10-year Gilts resuming their rise towards 5%.


At the September monetary policy meeting, the Bank of England opted to keep rates on hold, with five members out of nine voting for a pause. Over the past six weeks, the market received little UK data for the BOE members to change their stance. Yet, September’s inflation numbers showed that core CPI rose by 0.5% MoM and 6.1% YoY, slightly above expectations.

Therefore, it is reasonable to expect those members that have voted for a hike last month to vote for the same this week. The only significant exception is Jon Cunliffe, who previously voted for a hike, left. Sarah Breeden takes his place, voting for the first time at this week’s MPC meeting. Her vote might be decisive. Yet, there is a high probability that at her first MPC meeting, Sarah will not vote against consensus, resulting in a 6-9 split in favor of a pause.

Still, the central bank cannot afford to lean dovish. UK inflation remains the highest among developed economies. At the same time, the labor market is tight, and the country depends on energy and goods imports. With upcoming elections in January next year, fiscal policies remain uncertain as Rishi Sunak is losing popularity, adding to inflation upside risk.

Within this environment, the BOE is on the verge of losing its credibility. It tightened the economy too little, too slowly. There is no option for Bailey other than sticking to the higher-for-longer rhetoric, hoping to maintain a hawkish bias while it's becoming more apparent that policymakers are afraid of breaking something. As high inflation becomes entrenched in the economy, the sterling will come under pressure.

The 3-month SONIA curve shows the BOE beginning to cut interest rates in September next year, a quarter after the ECB and the Federal Reserve. Bond futures expect the central bank to cut rates only twice in 2024 compared to three times in the US and Europe. Rates are also expected to never drop below 4.20% until 2029, leaving long-term Gilt vulnerable to a bear’ steepening of the Gilt yield curve, similar to what we have seen in the US.

Within this context, it’s hard to envision a Gilt rally. Ten-year Gilt yields are still likely to rise to 5% as inflation becomes more entrenched.

10-year gilts seem range bound between 4.20 and 4.75. However, within that range Gilts are in a slightly rising trend but need to break above 4.75 for further upside.

Source: Bloomberg.

Quarterly Outlook 2024 Q2

2024: The wasted year

01 / 05

  • Macro: It’s all about elections and keeping status quo

    Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.

    Read article
  • FX: The rate cut race shifts into high gear

    As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.

    Read article
  • Equities: The AI and obesity rally is defying gravity

    Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.

    Read article
  • Fixed income: Keep calm, seize the moment

    With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.

    Read article
  • Commodities: Is the correction over?

    Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992