🏦🇬🇧ING BoE November Scenarios

Markets fully expect a 15bp rate hike at the November meeting, and they’re unlikely to be left disappointed. Admittedly economists are more divided, and indeed until recently we’d also assumed that the MPC would prefer to hold off on any rate rises until 2022. That would allow time to assess the impact of the recent ending of the furlough scheme, among other things. But the recent message from Governor Andrew Bailey has been fairly blunt – he wants to act, and sees little point in waiting. This has been epitomised by the lack of pushback against the ever-increasing amount of tightening priced into financial markets over recent weeks. Waiting until December's meeting would buy time for more data to come through, but it would also mean that policymakers lack a post-meeting press conference or new forecasts to help explain their move to the public, something which the Bank takes seriously. If policymakers are keen to act, then Thursday's meeting seems like a better candidate. Could the Bank increase rates by more than 15bp this time? Never say never, but it risks opening the floodgates for yet more additional tightening to be priced into financial markets.

Admittedly we might not get a great deal of explicit pushback in Thursday's policy statement, but there will be a number of clues elsewhere.

GBP: At risk of handing back some hard-won gains GBP has undoubtedly benefited from the dramatic re-pricing of the UK money market curve since early September. However, the BoE’s broad, trade-weighted measure of GBP is up only 1.1% over the same period, so it seems fair to describe GBP gains as ‘hard-won’. With a 15bp hike now fully-priced for the 4 November BoE meeting, we suspect that any concern over voting patterns (8-1 or 7-2?) plus some mild rate protest from the BoE through its 2-3 year CPI forecast could prompt a modest correction in GBP. BoE day event risk priced in the FX options market puts the cost of a EUR/GBP straddle at around 50 GBP pips. Based off the current spot near 0.8450, we think some modest disappointment – and a re-pricing lower of the 1.25% Bank Rate for late 2022 – could carry EUR/GBP to the 0.8500 area. The sharp turn lower in gas prices would also seem to leave GBP a little vulnerable as the surge in late September and into October helped drive BoE tightening expectations higher and this factor is now reversing. Longer term, however, a BoE hike well ahead of the European Central Bank should see EUR/GBP rallies as short-lived. Into early 2022, we expect EUR/GBP to be trading below the 0.84 area.