Taking a step back
Heading into the Bank of England meeting last week investors were fully pricing in a 15bps hike to 0.25% with a further four 25bps being priced in for 2022. In the end the Bank of England sorely disappointed markets and the MPC vote was 7-2 in favour fo keeping rates unchanged. Saunders & Ramsden were the dissenters who were in favour of rate hikes. The rest of the MPC wanted to wait on jobs data before hiking rates and the market will be more cautious from here on in about pricing in Bank of England rate hike signals.
The medium term bullish perspective still remains
The Bank of England now has a market implied rate path of a move up to 1.00% by the end of 2022. Prior to the meeting Sonia futures were anticipating four 25bps rate hikes next year alone. So, although the Bank of England has pushed back strongly against the steep rate path a move higher to 1.00% is still the base case.
Inflation still seen as transitory with a peak to 5% in April 2022 on the table according to the BoE However, the BoE do expect these pressures to fade: "the upward pressure on CPI inflation is expected to dissipate over time, as supply disruption eases, global demand rebalances, and energy prices stop rising'. So, temporary even if a little more persistent.
The return of Brexit risk?
Aside from monetary policy there is the possibility of Brexit woes returning to the UK. Will the UK trigger article 16? Will the EU actually scrap the existing Brexit deal? This can result in some shock price moves for the GBP, so keep that in mind.
