Bank of England to hike Bank Rate by 25bps - TDS

Analysts at TDS expect the Bank of England to hike Bank Rate by 25bps today and will be the MPC’s first rate hike in over 10 years.

Key Quotes

“The vote is likely to be 7-2 in favour of a hike (with Ramsden dissenting, alongside one of Cunliffe or Tenreyro), though we see risks of an 8-1 or 6-3 outcome.” 

“Key to this week’s decision will be the MPC’s tone regarding future hikes. The MPC is likely to reiterate that Bank Rate will need to rise at a faster pace than markets expect (currently, 3 hikes by 2020). Indeed, we expect this hike to be the first of a gradual hiking cycle, with another hike following in February before pausing until early 2019 as Brexit uncertainty is resolved. Two rate hikes should then follow in 2019.”

“FX:  Recent gains leave GBP vulnerable to a pullback unless the MPC sends further hawkish signals through the vote or guidance on future rate path. Our base case suggests a “sell-the-fact” reaction is likely for sterling, but a surprisingly hawkish outcome would extend its rally until focus turns to the next round of Brexit negotiations (9 Nov).” 

“Rates: With two hikes well priced by end-2018, our focus is on the BoE’s communication regarding the second hike’s timing.  The sell-off seen since the September meeting suggests that market reaction will be less extreme unless the BoE turns more hawkish from here. We continue to favour front-end steepeners in the Sonia curve.”