Bank of England: Focus definitely much more on forward guidance  Danske Bank

On Thursday, the Bank of England will announce its decision on monetary policy. A 25 basis point interest rate hike to 1.00% is expected. In line with consensus and market pricing, analysts at Danske Bank expected the central banks to hike by 25bp but they warn focus is definitely much more on forward guidance than the rate hike itself. 

Key Quotes: 

“We expect the Bank of England to stick to its more dovish signals, although higher-than-projected inflation and rising inflation expectations increase the probability of the BoE turning more hawkish once again. The Bank of England sounds concerned about the growth outlook and the BoE projected a rise in the unemployment rate eventually in the February 2022 Monetary Policy Report. If we are right, however, about the BoE sticking to its dovish signals, it is likely to weigh on GBP given the hawkish market pricing.”

“Markets are pricing in a total of 150bp for the rest of the year (so basically a 25bp rate hike at each of the remaining meetings with risks skewed towards a 50bp rate hike at one of the upcoming meetings). Our Bank of England call is two additional rate hikes (August and November) but see risks skewed towards more rate hikes.”

“We are still of the view that EUR/GBP will trade around 0.84 this year. On the one hand, GBP usually benefits when USD performs but on the other hand GBP is no longer supported as much by relative rates and things may turn around if ECB turns more hawkish and/or BoE remains more cautious than what markets are pricing in. GBP/USD has declined a lot recently and we think the cross can move further down over the coming year.”