As expected, the Bank of England decided not to hike the Bank Rate at this meeting (vote count unchanged 7-2, a bit dovish as some had thought it might be 6-3) , as economic indicators surprised to the downside. The seven members voting for staying on hold thought that it would be good to see 'how the data unfold over the coming months to discern whether the softness in Q1 might persist' , as the 'cost of waiting was likely modest' , supporting our view that the hiking cycle is postponed, not cancelled, but that there will be fewer rate hikes than previously thought . BoE governor Mark Carney highlighted a couple of hawkish things at the press conference: (1) he said that growth only needs to pick up slightly to be above potential (0.25% q/q), which should tighten the labour market further, and (2) domestic cost pressure is increasing with stronger wage growth. It is interesting that the projections (inflation staying above or at 2% over the forecast horizon and the unemployment rate to drop further to 4%) are based on the market pricing from before the meeting of approximately one hike a year the next three years. We stick to our call with one hike in H2 18 and one in 2019 with the next hike likely in August . That said, the probability of August has declined slightly , as we only get three months more data in August, which may not be enough for the majority of the BoE members.
Market expectations of future rate hikes dropped slightly after the announcement and UK interest rates dropped some 3-5bp across the 2-10Y yield with a modest steepening of the yield curve, as the shorter-dated tenors declined the most. The market is now pricing around 50% probability of a rate hike in August , while the first full 25bp rate hike is priced to arrive in February 2019. Timing of the next BoE rate hike remains highly data dependent and we see market pricing as fair for now , with risks skewed to the upside for UK yields in the coming months, if we are right in our call that the BoE will hike the Bank Rate in August.
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