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ING’s Chris Turner highlights that Bank of England (BoE) Governor Andrew Bailey pushed back against aggressive tightening expectations, warning markets are overpricing rate hikes that hurt confidence. Turner expects limited second-round inflation effects given a growing output gap and weak pricing power, and sees scope for EUR/GBP to rise if survey data support a softer Bank of England path.
BoE pushback may lift EUR/GBP
“Bank of England Governor Andrew Bailey appeared to deliver a rate protest in an exclusive interview with Reuters yesterday. He emphasised that markets were ‘getting ahead of themselves’ in pricing a series of rate hikes this year. The surge in short-dated UK rates during this Middle East crisis, fuelled by what was perceived as a very hawkish MPC meeting on 19th March, has clearly damaged both business and consumer confidence. A key takeaway from yesterday’s interview was that the BoE should fulfil its remit in a way that causes the least damage to the economy and the people. We saw a more than 100bp rise in two-year swap rates last month, and the BoE’s role in that spike is clearly an issue.”
“Whether Governor Bailey is successful in putting the hawkish genie back in the bottle will depend on the data. Today sees the release of the important BoE Decision Maker Panel (DMP) survey – a survey of 2,000-2,500 CFOs. Of key interest will be what CFOs are thinking about pricing power. Input costs will have gone up, of course. But will CFOs feel that selling prices and wage costs will rise too?”
“We are in Andrew Bailey’s camp with the view that a growing output gap and weak pricing power mean that there are limited chances of second-round effects from this energy supply shock. Were the DMP to confirm this, with, say, expected selling prices remaining near 3.0% year-on-year and wage costs at 3.5/4.0% YoY, we suspect the market can further rein in the near 50bp of expected BoE tightening this year. If so, EUR/GBP could make its way back to the 0.8790/8800 area – where it was trading at the end of February.”
