BOE hikes in line with Fed, ECB; SONIAs rally, curve snaps steeper

BOE MPC Bailey May 2022
The MPC failed to match dark predictions of a possible 50bps hike, and opted for the favoured choice, prompting steepening all the way along the curve

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MPC hikes in line with Fed, ECB; Curve snaps steeper

The MPC today failed to match the dark predictions of a possible 50bps hike, and opted for the favoured choice (SONIA was pricing in 32bps shortly before the decision) of +25bps to take Bank Rate to 5.25%. The hike matches in size the two recent dovish hikes by the ECB and the Fed and saves the BOE from being identified as a hawkish outlier versus the two big central banks.


Just to make sure people knew the Bank isn’t wimping out on its battle to bring down the largely-imported high levels of UK inflation, the MPC said in a statement that rates will remain “sufficiently restrictive for sufficiently long” as necessary to reduce inflation. Not quite as catchy as Draghi’s “whatever it takes” quote for the ECB in the very different circumstances of 2012, and worryingly a detail that hints of a reluctance to engage in a rapid turnaround to easing mode.


Nothing explicit has emerged so far on how the BOE sees the future pace of QT and gilt sales ahead of an MPC vote next month. Still, the MPR does contain a section discussing the issues around QT (see 'Box A: Reviewing the process of quantitative tightening' here).


The MPC was as divided as ever today, with Mann and Haskel voting for +50bps, Dhingra voted ‘no change,’ while the remaining six coagulated around the 25bps hike position. The MPC also announced it has lowered its growth forecast for the next two years and raised its medium-term inflation forecast, the latter not boding well for fans of ‘one-and-done.’ In the shorter term though the Q4 inflation forecast was cut from 5.1% to 4.9%.  


BOE Governor Bailey said in the MPC statement that “inflation is falling, and that’s good news,” before ruining the mood by adding that “we know that inflation hits the least well off hardest, and we need to make absolutely sure that it falls all the way back to the 2% target.”


Today’s decision led to a rally in GBP fixed income led by the front end but out to almost the 10y area with Sep24 SONIA +12bps after the news. Two-year gilt yields are currently -9bps, 10y is +1bp and 30y is +7bps, at 4.61%, as the MPC’s Q&A continues and as USTs bear-steepen in the background. Swap spreads are wider in the front end, led by a 1.2bps jump in the 5y ASW to 33.2bps, while further down the curve they are around 1bp cheaper.


The hike extends a run of hikes this year, with 50bps in June, 25bps in May and March and 50bps in Feb, which have helped propel the Bank Rate from just 10bps at the end of 2020 to its elevated level today.


Bank strategists’ predictions from here range from a total of 75bps more hikes, to two 25bps hikes, to a pause followed by no further hikes and eventually cuts. Those who dream of a still-functioning UK economy probably prefer the latter path but the MPC recently has seemed to be been in no mood to let economic considerations get in the way of its good work. SONIA MPC forwards have fallen by 10-12bps along the curve with the imp


Inflation is little changed with the RPI swap curve a touch steeper on the back of a 1-3bps drop at the very front end versus gains of 2-3bps further out.