Geoff Yu at BNY argues that the Bank of England (BoE) is likely to keep policy unchanged despite energy-driven price pressures, as markets have already tightened financial conditions. He sees the United Kingdom's (UK) constrained fiscal space and potential tax-threshold relief as key for demand and gilt supply, judging current BoE tightening priced by markets as excessive but still supportive for British Pound (GBP) resilience.

BoE caution meets tight fiscal space

"The BoE is not expected to shift its policy stance this week despite renewed price pressures from energy. To paraphrase Governor Andrew Bailey’s views on transmission mechanisms, the market is already doing the tightening for them. Mortgage rates have already rebounded significantly due to the recent rise in swap rates, and even if tensions de-escalate, the reversal process is asymmetric and unlikely to be swift."

"In our view, the fiscal outlook will make a bigger difference to policy expectations. The new government has already launched several initiatives that reflect fiscal relief, with a major package due in early Q4. Reports point to raising tax thresholds as the main goal, helping offset the effects of fiscal drag in recent years."

"We believe current BoE pricing of around 42bp in tightening by year end looks excessive, but upside growth surprises can help with GBP resilience."

"The BoE is expected to hold rates at 3.75%, with at most two dissents. Although headline inflation risk has picked up, the Monetary Policy Committee is even more minded to focus on softer inflation. Governor Andrew Bailey continues to stress that wage growth is also slowing."

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