ING’s Michiel Tukker and Padhraic Garvey expect no change in the Bank of England (BoE) policy rate at the upcoming meeting, despite markets pricing in substantial tightening. They stress that United Kingdom (UK) rates are highly sensitive to Oil moves and argue that current expectations for around 70 basis points of hikes over 12 months look stretched given the already restrictive 3.75% policy rate.

Sterling rates tied closely to Oil

"The Bank of England is next in line, but similar to market pricing, we don’t anticipate any change to the policy rate at today's meeting. Markets continue to be relatively hawkish when it comes to the UK, much more than we think is justified based on macro dynamics. But even if you disagree with current pricing, taking a bullish position will quickly burn you on the back of oil volatility."

"Compared to USD and EUR rates, sterling rates are particularly sensitive to oil price swings. For every $10 move higher in oil, markets add some 20bp of expected BoE tightening."

"Looking ahead, we don’t expect the Bank of England to hike at all, and even though we might see more votes for hikes, the doves will likely keep a majority. With markets already positioned for significant tightening, we doubt a hawkish tilt in voting behaviour will be able to push markets much."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)