Strong risk of hawkish pivot from BoE

Governor Bailey himself cautioned over “exaggerating” the rise in long-term borrowing costs earlier this month.

In other words, the MPC is concerned that by continuing to slash the base rate, we could see a rise in inflation expectations, a jump in long-dated gilt yields and a steepening in the curve, which would be counterproductive to the bank’s goal.

We expect these fears to be reflected in a slightly more hawkish set of meeting minutes on Thursday. On balance, we think that the rate guidance will probably remain unchanged from the previous meeting, with the bank to stick to its “gradual and careful” approach, which would give the MPC optionality to cut rates again in November.

We think that there is a strong risk, however, that this language is tweaked in order to convey to markets that the committee is veering away from its quarterly pace of cuts, in favour of an elongated pause.

For now, we are standing by our call in favour of no more cuts from the Bank of England throughout the remainder of the year. We think that the continued rise in UK inflation is incompatible with further easing, and the bank is rightly wary of triggering a further sell-off in long-dated gilts.