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

Brown Brothers Harriman’s Elias Haddad anticipates the Bank of England (BoE) maintaining its policy rate at 3.75% with a probable 6-3 vote, as falling UK wage and services inflation permits a pause. The BoE plans to reduce the pace of quantitative tightening, while markets anticipate an overestimated 125 basis points of hikes. This leaves the British Pound vulnerable to a dovish BoE adjustment of its rate outlook.

The Bank of England is expected to keep the policy rate at 3.75% for six consecutive meetings, with a likely 6-3 vote featuring Megan Greene, Catherine L Mann, and Huw Pill supporting a 25 basis points increase. Nonetheless, easing UK wage growth and services inflation provide the BoE with room to maintain the current stance. The UK's July labor market data and August CPI are anticipated to further support this trend.

The BoE is also set to decrease its bond sales from £70 billion to £50 billion in fiscal year 2026-2027, keeping active gilt sales relatively stable around £20 billion. However, a slower reduction pace might not counteract the upward pressure on gilt yields driven by higher energy prices. The swaps curve suggests 125 basis points of BoE rate hikes in the next twelve months, reaching a potential 5.00%, which seems overly aggressive and exposes the Pound to a potential BoE repricing.

Factors such as the UK's negative output gap, the policy rate already near the top of the BoE's 2% to 4% neutral range estimate, and the prospect of tighter fiscal policy all indicate the need for a more measured hiking cycle.