Danske Bank expects the BOE to keep its bank rate unchanged today but says that if a rate hike materialises, it will be a dovish one
The firm argues that:
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.
Adding that markets have been too aggressive in pricing in rate expectations for the BOE next year, expecting that the central bank may move with a total of 65 bps worth of rate hikes in 2022 as opposed to the 125 bps priced in going into today's meeting.
