Bank of England: 25 or 50 basis points rate hike? Bank of England: 25 or 50 basis points rate hike? Bank of England: 25 or 50 basis points rate hike?

Bank of England: 25 or 50 basis points rate hike?

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  The UK macroeconomic backdrop calls for another 50bps rate hike, but the Bank of England, afraid of overtightening, might opt to hike rates just by 25bps. Such a decision would leave Gilts vulnerable to a more aggressive tightening in the fall unless the BOE pre-commits to a September rate hike. Overall, the summer bull-steepening of the yield curve might extend until the end of the month. Yet, a bear-flattening is likely to resume in September as it becomes clear that the BOE remains well behind the curve. On the other hand, a 50bps rate hike will push bond futures to price a peak rate above 6%, provoking a bear flattening of the yield curve. Bailey will be in a difficult position to defend whatever policy decision as the central bank’s inflation forecasts remain unreliable and under review.

The steepening of the UK yield curve has short legs

The steepening of the yield curves in Europe and in the US hasn’t left the UK yield curve unaffected. The spread between 10-year and 2-year Gilt yields rose by 27bps from -91.26 bps at the beginning of July, the lowest on record since 2000.

Although yields fell across all maturities, 2-year Gilt yields have dropped faster after testing resistance at 5.50%. They now remain in an uptrend, trying to break above 5%, a level likely to be broken if it becomes clear that sticky inflation remains a problem, requiring much tighter monetary policies. 

Source: Bloomberg.

The recent drop in UK rates has mirrored improved sentiment in Europe and the US, where inflation is decelerating, fostering speculations that the Fed and the ECB might be approaching the end of their hiking cycle.

However, even though core inflation for June was revised downward to 6.9% from 7.1%, the UK continues to experience the highest inflation in the G7 economies. At the same time, the labor market remains tight while wages continue to pick up.

The macroeconomic backdrop calls for more tightening. However, financial markets remain wary of pricing a peak rate above 6% as they believe that the BOE might be near to risking a deep mortgage crisis.

The 2-year swap spread remains elevated, showing that 2-year gilt yields can run higher. Therefore, even if, at this meeting, the BOE decides to hike only by 25bps and yields adjust lower mimicking rate moves in the US and Europe, Gilts will remain vulnerable to renewed inflation worries in the fall.

Source: Bloomberg

In the meantime, 10-year yields remain rangebound between 4% and 4.6% as economic data remain in focus next week.

Source: Bloomberg.

Hypothesis 1: The Bank of England hikes rates by 25 basis points

In this case, the market will confirm expectations for the peak rate to be around 5.75%, provoking a further bull steepening of the UK yield curve. Two-year Gilt yields might further drop to find support around 4.68%.

There are several risks linked to such a decision.

First of all, the BOE might risk remaining the last hawk standing. While the ECB and the Fed prepare to end their hiking cycle, the fight against inflation is still ongoing in the UK, calling for the BOE to continue to tighten monetary policies while its peers will not.

Secondly, if the BOE hikes only by 25bps, it opens to the risk that it might need to hike rates by 50bps again in the future, increasing uncertainty surrounding the central bank's forward policy. Therefore, the bond market must price a higher risk premium in Gilts, exposing the yield curve to more volatility.

The only advantage of such a decision is that the BOE will not risk overtightening, especially in light of the BOJ exiting its yield curve control policy. Yet, the normalization of monetary policies in Japan will likely take a long time, while concerns regarding inflation in the UK are ongoing.

Hypothesis 2: The Bank of England hikes rates by 50 basis points

If the MPC wants to remain credible and stick to its data-dependent approach, it will hike rates by another 50bps. This way, it will catch up with the Fed and the ECB without running the risk of continuing to raise rates much further into the future while its counterparts end their hiking cycle.

In that case, markets will increase the chances for the peak rate to be around 6.25%, provoking a bear flattening of the yield curve. Two-year yields will resume their rise to test resistance at 5.5%.

Hypothesis 3: The Bank of England hikes rates by 25 basis points and pre-commits to another rate hike in September

Despite the BOE doesn't like to set forward interest rate guidance and largely remains data dependent, during this meeting, there may be scope to hike by 25bps and pre-commit to another 25bps hike in September. Markets would interpret such a move as a hawkish hike, as the BOE guarantees another rate hike when the Federal Reserve and the ECB are largely expected to pause.

Such a strategy would leave room for a peak rate of around 5.75%-6%. However, the implied message is that the central bank will arrive there by hiking at a pace of 25bps rather than 50bps. That would push the current peak rate expectations slightly higher. Rates will remain underpinned around their trading levels today, tilting up.

The problem with such a strategy is that the BOE cannot use its economic forecasts to back up such a decision. Indeed, an external review by Ben Bernake is beginning as the central bank’s forecasts have been largely unreliable.


The Saxo 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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 (
- Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.