Bank of England Preview – Look to Sell GBP on Aggressive BoE Pricing

• We expect the Bank of England (BoE) to hike the Bank Rate by 25bp on 22 June.
• While we now expect a peak in the Bank Rate of 5.00%, we see current market pricing of a peak in policy rates of 5.75% as too aggressive.
• EUR/GBP is set to move higher on the statement as we expect the BoE communication to fail to live up to market expectations.

BoE call. We expect the Bank of England (BoE) to hike the Bank Rate (key policy rate) by 25bp on 22 June, bringing it to 4.75%. This is in line with markets expectations. We expect a slight hawkish shift in communication given the latest releases showing increased persistence in inflation and a tight labour market. However, we do not expect it to live up to market expectations.

Since the last monetary policy decision in May, both wage growth and inflation releases have surprised to the upside. Likewise, other central banks, namely the Reserve Bank of Australia (RBA) and Bank of Canada (BoC) have gone against market expectation and further increased policy rates. Combined with the UK economy holding up much better than expected, this has increased the pressure on the BoE. As 25bp looks like a done deal for this meeting, focus will primarily turn to communication with respect to the future course of monetary policy action and language regarding the renewed surge in the persistence of inflation.

The latest labour market report was broadly stronger than expected and highlights that the UK labour market remains under immense pressure. Wage growth excluding bonuses increased to 7.2% (up from 6.7%) with wage growth accelerating in the private sector. Likewise, unemployment ticked lower to 3.8% following increases the past months.

Although inflation figures for May will not be published until the day before the rate announcement, the April figures exceeded the consensus expectation for both headline and core inflation. The core inflation recorded a significant month-on-month growth of 1.22%, marking the highest increase in decades. While the headline inflation fell 0.2 percentage points below the BoE’s forecast, we anticipate that BoE will place greater emphasis on wage growth and persistent core inflation. This is particularly noteworthy as the contribution from services rose to 3.2% from a previous 3.1%. Likewise, the latest BoE’s monthly Decision Maker Panel survey showed that inflation expectations ticked higher in May, with both 1Y- and 3Y ahead CPI inflation expectations increasing.

On the back of recent events we add an additional 25bp hike in August to our forecast profile and thus see the Bank Rate peaking at 5.00%. This is significantly less than market pricing, which has increased the previous months to a peak rate of 5.75%, up from 4.80% in May. We expect no rate cuts until 2024.

FX. In our base case of a 25bp hike, we expect EUR/GBP to move higher. While we expect the BoE to highlight that inflation has proven more persistent than previously expected, we believe that they will fail to live up to market expectation of a hawkish pivot. On balance, we increasingly see relative rates as a positive for EUR/GBP from here, which is one of several reasons behind our fundamental predisposition of buying EUR/GBP dips.