Commerzbank’s Michael Pfister highlights that Bank of England (BoE) Governor Andrew Bailey has pushed back against aggressive tightening expectations, stressing labour market weakness and limited pricing power. He reiterates its view that three BoE hikes this year are unlikely and expects rates to remain unchanged, underpinning a forecast for higher EUR/GBP over coming months despite reduced market sensitivity to rate expectations.

BoE pushback tempers tightening path

"Over the past few weeks, we have repeatedly emphasised that interest rate expectations for the Bank of England have been among the most sharply revised in the wake of the conflict in Iran - and that we consider this reaction to be excessive."

"Yesterday, it seemed that Bank of England Governor Andrew Bailey had also reached his limit. He made it clear in an interview that market expectations regarding interest rate hikes had gone too far. He also emphasised that the Bank of England must pay attention to the weakening labour market and economic growth itself, and that companies currently have less leeway to raise prices."

"We had repeatedly emphasised that three interest rate hikes this year were unlikely. The labour market had already weakened significantly before the outbreak of the war, and while inflation remains above target, it is unclear how much further it could rise given the weaker demand-driven inflationary pressures."

"Meanwhile, the market is now pricing in two more BoE rate hikes this year instead of more than three at the peak. But based on Bailey's statements, we still anticipate a correction and expect interest rates to remain unchanged this year."

"Although FX markets are currently reacting less to changes in interest rate expectations, this is nevertheless one of the reasons why we still anticipate higher EUR-GBP levels in the coming months (alongside political risks)."

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