Market Pricing for BoE Rate Hikes Seen as Too Aggressive by BBH

UK Chancellor John Healey's pledge to build a solid fiscal 'buffer against uncertainty' in the October 28 Budget has sparked concerns about tighter fiscal policy. This move, combined with a negative output gap and a policy rate above the mid-point of the Bank of England's (BoE) neutral range estimate, may signal a less aggressive hiking cycle.

According to Brown Brothers Harriman's (BBH) Elias Haddad, market pricing for 75bps of BoE rate hikes in the next twelve months to 4.50% is 'too aggressive'. This leaves the British Pound (GBP) vulnerable to a dovish BoE repricing.

The swaps curve suggests that the UK's July Gross Domestic Product (GDP) will not alter BoE expectations, despite being due on Friday. The real GDP is expected at 0.0% month-on-month versus +0.3% in June, as July's decline in retail sales volumes offset an improvement in the composite PMI.