Brown Brothers Harriman’s (BBH) Elias Haddad highlights that the Bank of England (BoE) left rates at 3.75% with a 6–3 vote, while Governor Andrew Bailey pushed back against expectations of an imminent hike. Haddad sees room for United Kingdom (UK) rate expectations to be revised lower, a headwind for British Pound (GBP), even as the BoE signals it may slow quantitative tightening against a backdrop of fiscal policy uncertainty.

Rate expectations pose headwind for GBP

"Yesterday, the Bank of England (BoE) kept the policy rate at 3.75% for a fifth straight meeting which was widely expected. The vote split was 6-3."

"We see scope for a downward adjustment to UK rate expectations which is a headwind for GBP. The swaps curve implies 50bps of tightening to 4.35% in the next twelve months."

"Aside from the bank rate decision, the BoE also flagged it may further reduce the pace at which it shrinks its bond holdings. First, the BoE raised its estimate for the increase in the term premium on long-term interest rates due to Quantitative Tightening (QT) by 5bps to between 20-30bps, indicating QT is delivering more tightening than anticipated. Second, a much smaller volume of maturing bonds is in the pipeline next year; £30.5bn vs. £49.1 in the current cycle."

"BoE policymakers will vote on QT at the September 17 meeting. We expect the BoE to reduce its gilt holdings rundown to £50bn over October 2026 to September 2027 from currently £70bn."

"Nonetheless, a slower pace of BoE balance sheet runoff is unlikely to offset the upward pressure on gilt yields from fiscal policy uncertainty. Prime Minister Andy Burnham leans towards higher spending and borrowing, but the details of his fiscal plan may not emerge until the October budget."

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