Tue, Nov 29, 2022 @ 14:32 GMT
HomeContributorsFundamental AnalysisBoE Maintains Neutral Bias Despite Increasing Inflation

BoE Maintains Neutral Bias Despite Increasing Inflation

As widely expected, the Bank of England (BoE) made no policy changes at its February meeting.

As we highlighted in our preview, the BoE maintained its neutral stance, as it can move ‘in either direction’. This was perhaps more dovish than some market participants had expected, which may explain the depreciation of the GBP and lower UK yields.

We still expect the BoE to remain on hold for the next 12 months.

Notice that the BoE reaction function has changed since the financial crisis, so the BoE puts more weight on growth/unemployment relative to inflation.

Markets have priced in a 40% probability of a hike this year, which we think is too hawkish. A full hike is priced in around October next year.

We still expect GBP crosses to remain volatile in the near term and think GBP will face renewed pressure in coming months as the UK moves towards triggering Article 50 and exiting the EU.

As we think markets price BoE too hawkishly, there is also little support for GBP from relative rates from here.

We target EUR/GBP at 0.88 in 3M.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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