The Bank of England’s recent meeting resulted in a minor 5 basis points hawkish repricing of the sterling curve. Catherine Mann has shifted away from the dovish stance, with only one member voting against the hold.
Data uncertainty remains high, with expectations of three interest rate cuts this year due to the impacts of higher corporate taxes, US tariffs, and impending budget constraints. While risks to growth appear to lean downwards, inflation has been persistent, leading to cautious Sonia pricing with two cuts anticipated by year-end.
Impact Of The Upcoming Budget
Next week’s budget could further influence GBP dynamics, affecting growth and the bond market negatively. Preference lies in trading GBP weakness through Cable rather than EUR/GBP.
The recent Bank of England meeting has resulted in a slight adjustment in market expectations, with the sterling yield curve reflecting a modest increase in anticipated tightening. A shift in stance from Mann, who has moved away from a previously more dovish approach, suggests internal discussions may be tilting towards caution. Only one policymaker opposed the decision to hold rates steady, reinforcing the message that while economic risks remain, inflation concerns are far from dismissed.
Market participants have been pricing in three rate cuts for this year, with expectations shaped not only by domestic pressures but also by external factors such as heightened US tariffs and the strain of elevated corporate taxes. Fiscal tightening ahead will likely weigh on business investment and household spending, adding further uncertainty to growth projections. Despite downside risks to the economy, inflationary pressures have been persistent enough to keep the Sonia curve conservative, with two rate reductions still forecasted by December.
With a fiscal event approaching, there is potential for added volatility. Any unexpected shifts in tax policy or public spending plans could impact sentiment towards UK assets, shaping both growth forecasts and gilt performance. The preference remains towards expressing any sterling weakness through Cable trades rather than EUR/GBP. The latter is likely to be less reactive given simultaneous policy uncertainty within the Eurozone.
Positioning In The Derivatives Market
For those involved in derivatives, the next few weeks should be navigated with an emphasis on positioning for further developments in fiscal policy. The balance between economic growth risks and inflationary pressures will remain central in shaping rates expectations and, by extension, yield curve movements.
