BoE Watch

2 min read
Divyang Shah

A reduced likelihood of a Grexit, coupled with lower volatility on China’s stock market, has helped to shift the focus back toward the timing of lift off from the Fed and BoE.

The comments from BoE Governor Carney and Fed Chair Yellen yesterday highlight, that despite the uncertainty, we are edging closer to one of these central banks pulling the trigger.

We still think that the BoE will prefer to wait until after the Fed has lifted rates before embarking on its own policy normalisation. The Overnight Index Swap (OIS) market is in agreement with a rate hike this year as being fully priced on Fed Funds, while for the BoE a rate hike is not seen until early next year.

The OIS market also shows that a modestly, more aggressive tightening is expected from the BoE compared to the Fed. 1y1y forward OIS on GBP is some 15bp higher than that on USDs.

This is a trend that started to appear at the beginning of 2015 when 1y1y GBP was actually some 30bp below that of 1y1y USD.

The 1y1y OIS divergence suggests that while the market believes the Fed and BoE have the flexibility in timing liftoff, when the trigger is finally pulled the BoE will be less limited and gradual than the Fed.

Eikon

Source: Thomson Reuters Eikon

Divyang Shah
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