BoE Preview: A close call – Danske Bank

On Thursday, the Banko of England (BoE) will announce its decision on monetary policy. According to analysts from Danske Bank, it is a close call whether the central bank hikes or not. On balance, they expect the BoE to keep monetary policy unchanged.

Key Quotes: 

“The Bank of England (BoE) meeting on Thursday 4 November is going to be a key market mover this week. What was unthinkable in the beginning of the year, is now a real possibility. Will the BoE raise the Bank Rate or not? Investors have more or less fully priced in a 15bp rate hike while economists are evenly divided between unchanged and a 15bp rate hike. The sudden hawkish shift in September was a major driver of higher yields also in Europe, so BoE’s policy decision is also going to be interesting from a broader market perspective.”

“Bank of England has not pushed back on market pricing, but to some extent it probably also reflects that BoE policymakers have very different views on the economy. It is much more difficult for central banks to communicate to markets when policymakers disagree on the fundamental analysis of what is going on. If we are wrong, we expect a dovish hike, as we expect the BoE to say a hiking cycle will be “gradual and limited”.”

“A dovish rate hike is probably also what is needed for the hawks to get support from neutral and dovish BoE policymakers.”

“Markets are pricing in very aggressive rate hikes from the Bank of England until 2022 (a total of 125bp rate hikes from now until year-end 2022), which we believe is wrong – and at least very different from what the Bank of England communicated at the last meeting. We expect a total of 65bp rate hikes on the same horizon. It is also notably that markets are pricing lower rates starting from 2024.”