11th May 2017 (Post BoE)
Analysis of the rates markets can give us an accurate guide on the market’s perception on the outlook for hikes or cuts at future policy meetings. The table below summarises what’s priced in for Bank of England (BoE) hikes or cuts at the next MPC meetings: how many basis points, how many individual hikes or cuts this is equivalent to, and how the probabilities have changed.
Reminder: we base our pricing analysis on the OIS markets
As widely expected, the Bank of England left rates unchanged today. Markets were pricing in basically zero chance of a cut or hike anyway, so no surprises there. The question becomes to what extend the meeting minutes and Quarterly Inflation Report impacted market views for future meetings.
Looking at the table we can see that both before and after the BoE releases the market is clearly positioned for more chance of a hike than a cut moving forwards. Even before the announcements these expectations were muted, but the market now has even weaker expectations on rate hikes to come. To be precise, the market is now pricing:
-Just 15% chance of a hike by the end of this year, down from 24% this morning
–40% chance of a hike by May 2018 (1 year from now), down from 50% this morning
Why the change? Our InTouch Fixed Income and InTouch FX services covered this in depth, but many traders were focused on the rates vote (one hawkish dissent rather than two which some had thought possible) whilst others noted that the BoE had made some overly optimistic underlying assumptions in the QIR.
Our website also has a full schedule of upcoming BoE MPC meetings
Author: Michael Colman