British Pound: BoE hold, slower QT and dovish repricing risk – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad expects the Bank of England (BoE) to keep its policy rate at 3.75% with a likely 6–3 vote, as easing United Kingdom (UK) wage and services inflation allow a pause. The BoE is set to slow quantitative tightening, while markets price 125 bps of hikes that Haddad views as excessive, leaving the Pound exposed to a dovish repricing of the rate path.

Rate path and QT shape GBP outlook

"The Bank of England (BoE) is widely expected to keep the policy rate at 3.75% for a sixth straight meeting (Thursday). Another 6-3 vote is likely with Megan Greene, Catherine L Mann and Huw Pill backing a 25bps hike. Still, easing UK wage growth and services inflation give the BoE room to stand pat. The UK July labor market data (Tuesday) and August CPI (Wednesday) are expected to reinforce that trend."

"The BoE is also poised to reduce the pace at which it shrinks its bond holdings (quantitative tightening, QT) in part because of a much smaller volume of maturing bonds in the pipeline next year. We expect the BoE to reduce its gilt holdings rundown from £70bn to £50bn over October 2026 to September 2027. With £30.5bn of maturities due over that period, that would keep active gilt sales broadly unchanged at around £20bn."

"Regardless, a slower runoff pace is unlikely to offset the upward pressure on gilt yields from higher energy prices."

"The swaps curve implies 125bps of BoE rate hikes in the next twelve months to 5.00%. That’s too aggressive in our view and leaves GBP vulnerable to a dovish BoE repricing. The UK’s negative output gap, a policy rate (currently, 3.75%) already near the top end of the BoE’s 2% to 4% neutral range estimate and the prospect of tighter fiscal policy all argue for a less aggressive hiking cycle."

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