BoE Preview – Dovish MPR to Justify Another Pause

Summary

• We expect the BoE to hold the Bank Rate at 5.25%, likely with fewer voters backing a hike than at the last meeting (when it was 5:4 in favour of a pause).
• The MPR forecasts are likely to be far more dovish than at in August. Higher unemployment and lower expectations of wage growth will be the main drivers. The positive impact of lower priced interest rates should be more than netted out by this.

Market Implications

• We continue to like to receive near-term SONIA/be long near-term SONIA futures.
• We like to play the calendar box spread of SONIA and SOFR Mar24/Mar25 (long SFRH4H5, short SFIH4H5)
• We also still like 2s10s GBP steepeners vs EUR.
• And in FX, we like to be short GBP vs USD and EUR.

A BoE Pause and a Dovish MPR

In our recent BoE Monitor, we set out why think BoE bank rate has reached its peak. At the November meeting we continue to expect a pause, with fewer voters backing a hike than at the last meeting (when four voted for it). Thereafter, we see cuts as more likely than hikes at future meetings, which adds into our view that market pricing for future hikes can be faded.

On this basis, we continue to see value receiving near-term SONIA/be long near-term SONIA futures, positioning for 2s10s GBP steepeners vs EUR, playing the calendar box spread of SONIA and SOFR Mar24/Mar25 (long SFRH4H5, short SFIH4H5), and being short GBP.

The market has taken recent data releases as mixed, but we consider them dovish. Inflation, on the face of it, looked more hawkish, but, as we noted, the detail remained dovish. We expect the the BoE will likely focus on the latter, helped by the fact that the YoY core and headline numbers remain below the August MPR trajectory (Chart 1).

Meanwhile, ONS labour market data has been delayed, replaced and omitted. While that does not add much to the picture of the economy, it adds to the rationale for the MPC to lean on alternative sources. These sources suggest lower wage growth and continued labour market loosening (Charts 2 & 3).

The surveys also support re-anchoring inflation expectations (Chart 4). The BoE will have the latest DMP survey result (released Thursday) which are likely to further support this. Even before the BoE cast doubts on the efficacy of ONS wage data, we have had our reservations.

BoE Inflation Forecasts to Look More Dovish

The updated MPR will need to consider three key dovish factors:

• The labour market has loosened far more than the BoE had estimated in their August forecasts (Chart 5). This will suppress aggregate demand and ULC assumptions.
• Wage growth is likely revised down in their near-term estimates. At the August MPR, the MPC added an arbitrary wedge to their wage forecasts and increased the persistence of wage growth in their outlook. We noted back in August that the arbitrariness of the forecasts could mean it is rapidly unwound – we expect this process will begin now.
• Growth looks to have stalled in Q3, based on monthly data (Chart 6). ONS methodological revisions will mean it is shifted higher, but the trajectory ahead should remain stagnant.

The updated forecasts will also need to consider the more dovish pricing of the bank rate (Chart 7). That could lift the medium-term inflation rate. However, it is unlikely to make a significant difference given the fact that the ‘rates stable at 5.25%’ profile for inflation at the August MPR was almost identical to that with market pricing. In justifying this apparent oddity, the BoE was adamant that there are multiple paths to 2% target – they are likely to reiterate this line again.

MPC Composition Likely Less Hawkish

The departure of Cunliffe is unlikely to significantly affect the MPC’s composition. He had typically been a more dovish member, but at the last meeting he voted for a 25bp hike (the only internal member to do so). New joiner Breeden has been very cautious about taking a strong view before she has the full internal data picture, so it is hard to parse where she will sit on the next vote (Chart 8). The updated MPR is likely to guide her strongly, and, in that, we expect dovishness will prevail. On this basis, we expect the number of voters backing a hike to fall to at most three, with the possibility of fewer.

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Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

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(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)