BoE Tightening Cycle Sparks Concern Over Aggressive Rate Hikes

The Bank of England (BoE) is expected to raise interest rates in the coming months, but some analysts believe this tightening cycle may be too aggressive. According to Brown Brothers Harriman's Elias Haddad, the market is pricing in 75 bps of BoE rate hikes to 4.50%, which he deems too extreme given the current economic conditions.

The UK's negative output gap and a policy rate above the mid-point of the BoE's neutral range estimate suggest that a less aggressive hiking cycle would be more appropriate, Haddad argues. Additionally, the prospect of tighter fiscal policy and higher borrowing costs have reduced the government's fiscal headroom to around £12bn.

The upcoming UK July Gross Domestic Product (GDP) release is unlikely to alter BoE expectations, as it is expected to remain flat month-on-month. This lack of impact from the GDP release may leave the British Pound vulnerable to a dovish BoE repricing if market expectations are not met.