Halister News

(Bloomberg) -- Hawkish re-pricing of U.K. monetary-policy prospects since the last MPC meeting has been largely modest due to Brexit uncertainty as the BOE attempted to inject two-way risk into the front-end.

• The market has previously ignored the MPC warning that front-end pricing may be too dovish, with the first rate hike priced for early 2020 prior to the MPC split
• Sonia MPC-dated forwards price 49% chance of a 25bps rate increase in November, 10% for today, with first hike fully priced in August 2018
• Median economist forecast is for a 6-2 vote (BOE preview), which may see some paring back of expectations, while a 5-3 split/hawkish Carney would signal emphasis that the MPC is still not satisfied with the two-way risk in the front-end; however, they face price pressures nearing peak and Brexit uncertainty
• The U.K. 5Y real rate is higher by 60bps after touching a record-low -288bp in April with the BOE tone becoming more hawkish and inflation coming in weaker recently
• With inflation close to peaking and given the potential for a sharp fall thereafter to BOE’s 2% target, there is room for the post-Brexit-vote rally in the inflation markets to fade further out the curve
• Hawkish MPC shift, amid absence of domestically generated inflation and consumer real-income squeeze, caps inflation forwards

• NOTE: Tanvir Sandhu is an interest-rate and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice