UK Economic Insights
BoE Policy Monitor | Taper over the cracks; pay 2y1y SONIA


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.

Please click here to find all of NatWest Markets’ Strategy and Sales commentary/ideas. 

You can also find out more about our electronic offering and credentials for Rates here and for FX here.

This is Non-Independent Research, as defined by the Financial Conduct Authority. Not intended for Retail Client distribution. This material should be regarded as a marketing communication and may have been produced in conjunction with the NatWest Markets Plc trading desks that trade as principal in the instruments mentioned herein. All data is accurate as of the report date, unless otherwise specified.

This communication has been prepared by NatWest Markets Plc, and should be regarded as a Marketing Communication, for which the relevant competent authority is the UK Financial Conduct Authority.

Please follow the link for the following information

  • MAR Disclaimer
  • Conflicts of Interest statement
  • Glossary of definitions
  • Historic Trade ideas log

Note that the text above is subject to the disclaimer(s) accessible if you Click Here
Ross Walker
Co-Head of Global Economics, Chief UK Economist
+44 20 7085 3670
Theo Chapsalis, CFA
Head of UK Rates Strategy
+44 20 7085 9884


If you wish to discuss the content of this article further, please contact your usual sales person. Reminder, clients of Natwest Markets NV should reach out to their relevant NV sales person.

"Related Articles" Coming Up Next..
  • 1. BoE Inflation Report - Reinforcing Policy Neutrality
  • 2. BoE Inflation Report - Reinforcing Policy Neutrality
  • 3. BoE Inflation Report - Reinforcing Policy Neutrality
  • 4. BoE Inflation Report - Reinforcing Policy Neutrality