Commerzbank’s Michael Pfister notes that Bank of England (BoE) Governor Andrew Bailey has pushed back against aggressive market expectations for interest rate hikes, citing concerns about a weakening labour market and limited pricing power among companies [1]. Bailey stated in an interview that market expectations regarding BoE rate hikes had gone too far, emphasizing the need to consider economic growth and the labour market, which had already shown signs of weakness prior to recent geopolitical events [1].
Commerzbank reiterates its view that three BoE rate hikes this year are unlikely, and expects rates to remain unchanged, despite inflation remaining above target. The market has recently adjusted its expectations, now pricing in two more BoE rate hikes this year instead of more than three at the peak [1]. However, based on Bailey's statements, Commerzbank anticipates a further correction and expects no additional rate hikes in 2024 [1].
Despite reduced market sensitivity to changes in interest rate expectations, Commerzbank forecasts higher EUR/GBP levels in the coming months, citing both the repricing of BoE rate hikes and ongoing political risks as contributing factors [1].
CONCLUSION
The Bank of England's pushback against aggressive rate hike expectations has led to a repricing in the market, with fewer hikes now anticipated. Commerzbank expects rates to remain unchanged this year, supporting a forecast for higher EUR/GBP levels. Market impact is medium, driven by shifting rate expectations and political risks.