BoE governor Carney attempts to keep expectations biased towards a sooner rather than later rate hike are falling on deaf ears. The latest comes from a debate on the global economy at the IMF/WB annual meetings, where Carney repeated his July comment that a decision on rates will “comes into sharper relief around the turn of the year”.
Financial markets, however, have moved to no longer fully pricing in a hike in 2016. Over the past few years the markets have proved more accurate in not believing either the Fed or BoE in their desire to hawkishly fine-tune expectations.
Two themes that the market has focused on in believing a BoE rate hike will be delayed are:
1) the Fed outlook, and
2) risks related to China.
In his speech overnight, Carney downplayed both of these, suggesting the Fed decision was not decisive and with only limited impact from China.
The way in which to square the circle is to remember that the BoE December 10 meeting will come before the FOMC meeting on December 16. If the Fed shifts market expectations towards a rate hike, then the BoE could decide to pull the trigger ahead of the Fed. This is not our view, but it is something to be cognizant of despite the latest set of Fed minutes.
Tactically we would look to pay 1y1y GBP OIS at 82.5bp on:
1) either the risk that both the Fed and BoE decide to pull the trigger early, or
2) that the market has been overly dovish on the rate prospects for 2016.
We are for now maintaining our view of a BoE rate hike in Q3 2016 but our bias is that this will be pushed out to 2017.
