BOE to stay on hold through much of 2017 - TDS

Research Team at TDS is looking for the BOE to stay on hold through much of 2017, but the risks to easing will build due to Brexit-related uncertainty.

Key Quotes

“Our macro strategists expect the BOE to cut Bank Rate by 20bp in Q4 2017. In light of this, we think the steepening we have seen on front end money market slopes is unwarranted and we look to fade this heading into Q1 2017. In terms of duration, we can see a rise in nominal yields going into Q1 2017 when we will see a sharp rise in headline inflation. However, longer term, we would not expect 10yr gilt yields to rise significantly above 1.65% and would look to go long. Indeed as Brexit uncertainty rises the market should attach a greater probability to BOE easing via QE, which should keep yields contained.”

“In terms of curve, we see potential for the 10s30s gilt curve to steepen heading into the first half of the year as we see the sharpest rise in headline inflation, but then we would expect the curve to flatten as long duration demand from pension funds returns.”