Traders and economists are at odds over where the Bank of England goes after this week's interest-rate decision, with a hike widely expected on Thursday. The decision is largely seen as a done deal, so market attention is focused on the commentary from policymakers and the BOE's forecasts for growth and inflation.
If the central bank raises its outlook for inflation and growth while lowering its unemployment forecast, that could support expectations for faster tightening. Traders are pricing three more hikes by next summer, betting the central bank will tether inflation and worry less about a limp economy. Economists are far more cautious, seeing only a 50-50 chance of a second hike early next year.
Economists argue there is little evidence that energy-price-driven inflation is becoming embedded in the wider economy, and consumers are showing signs of pulling back on spending. If policymakers back that view and push back against a prolonged tightening cycle, UK government bonds could rally, particularly shorter maturities where yields have hit their highest in three years. Higher bond prices would mean lower yields, easing the elevated household and business borrowing costs that have helped the BOE in its fight against inflation.
Geopolitics adds further uncertainty. UK bonds outperformed peers on Monday as diplomatic overtures in the Middle East pushed oil prices lower and eased inflation fears, and volatility could return depending on the White House's reaction as US midterm voting begins. With market pricing and economist forecasts disconnected, gilt traders will be watching the BOE's statement and forecasts closely.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing