UK Economic Insights
BoE Policy Monitor | Taper over the cracks; pay 2y1y SONIA
2021-04-28T08:38:05

  

BoE Policy Monitor

Taper over the cracks; pay 2y1y SONIA

With economic activity data coming in above the Bank’s February Monetary Policy Report forecasts, a sizeable downward revision to the UK Government’s borrowing remit and tapering action by the Bank of Canada, we expect the BoE to reduce its QE purchase pace from~£18bn a month to ~£14.5bn with the announced buybacks concluding around mid-December.

We expect the BoE to leave monetary policy settings unaltered in May (Bank Rate at 0.10%, total QE purchase target at £895bn), with unanimous policy votes.

Whilst any tapering announcement may be taken by the markets as a harbinger of earlier monetary policy tightening, the UK’s medium-term economic and fiscal fault-lines remain all too apparent. Although we expect a decisive ‘hawkish’ shift in the MPC’s formal policy guidance before the end of this year – in the context of pent-up consumer demand and (temporarily) above-target inflation – we do not expect Bank Rate rises until well into 2023.

We look for upward revisions to the MPC’s GDP and CPI inflation projections (Table 3, p.4). For the CPI central projection, we forecast ~5bp increases at the policy-relevant 2-year (2.05%) and 3-year horizons (2.15%) – a reinforcement of the policy signal that prevailing market rate expectations err on the low side.

Rates trades: Pay 2y1y SONIA targeting 0.55% due to an upbeat BoE and increase risk in short 10y gilts, targeting 1%. Tapering in May is widely expected and back-end steepeners are too consensus so avoid them. Higher net DV01 could steepen the curve but this may not happen right after the May meeting.


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Authors
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Ross Walker
Co-Head of Global Economics, Chief UK Economist
London
+44 20 7085 3670
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Theo Chapsalis, CFA
Head of UK Rates Strategy
London
+44 20 7085 9884

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