BOE: A 25 BPS NEXT WEEK NOT FULLY PRICED IN INTEREST RATE MARKETS – RABOBANK

Next Thursday, the Bank of England (BoE) will announce its decision on monetary policy. A 25 basis point rate hike to 4.25% is expected. Analysts at Rabobank also see a quarter-point rate increase and warn that such scenario is not fully priced in the interest market, “which indicate that the chance of a hold has increased following the collapse of SVB.”

Fear, uncertainty and doubt

“The 2007-2008 financial crisis taught us that even small failures can lead to significant problems. While SVB's poor liquidity risk management was the underlying cause of its downfall, the shift from a 'lower for longer' to a 'higher, possibly for longer' interest rate regime acted as the trigger. This raises the question of whether other financial institutions could eventually face a similar situation, fuelling the infamous trio of fear, uncertainty and doubt.”

“We would therefore expect the hiking cycle to continue at a more moderate pace of 25bp at next week’s meeting. That would lift Bank rate to 4.25%. With external members Tenreyro and Dhingra surely not voting for an increase, five out of seven remaining policy makers would have to vote for such a hike. Indeed, it wouldn’t even come as a surprise if we’d see a three-waysplit, with Tenreyro and/or Dhingra even voting for a cut.”