UK: BoE to hike in May, higher yields across the curve- Danske

Analysts from Danske Bank,  look for a gradual flattening of the 2-10 and 5-10 yield curves in UK bonds. They expect the Bank of England to hike the key rate at the May meeting. 

Key Quotes: 

“Based on the hawkish signal the Bank of England (BoE) sent at its MPC meeting on 8 February, we expect the bank to hike the Bank Rate to 0.75% in May. As this seems like the BoE beginning a hiking cycle, we expect another BoE hike to follow in November, taking the Bank Rate to 1.00% by the end of the year. Provided that the global growth outlook remains intact, the timing and pace of future rate hikes is merely a function of GBP appreciation/depreciation, energy prices and wage growth.”

“Our expectations of a ‘two hikes per year hiking cycle’ is more hawkish than consensus expectations and more hawkish than the market’s pricing. The market is now pricing in an 80% probability of a rate hike in May (20bp priced) while two full 25bp rate hikes are priced in around April 2019. However, given the high economic and political uncertainty in relation to Brexit, we expect the market’s pricing to remain somewhat behind the curve, which was also the case in the US when the Fed started its hiking cycle.”

“We generally forecast higher yields across the curve and with the BoE expected to lift the front end much faster than the market’s pricing, we look for a gradual flattening of the 2-10 and 5-10 yield curves. We forecast yields on 2Y gilt at 1.40% in 12M and target yields on 10Y gilts at 2.00%.”