COMMENT-BoE pricing at peak hawkishness for 2025

Sticky price pressures remain a concern for the Bank of England and the recent data out of the UK would have done very little to alleviate those concerns.

The closely watched services CPI is tracking at 5%, which is a smidge higher than the bank’s projection of 4.9%. Wages also accelerated in the latest print with private sector pay growth back up to 5.4%, which in turn has exacerbated the hawkish repricing in UK rates.

Looking at 3-month SONIA futures in the chart below, the December 2024-2025 spread shows that markets project 50bps of easing next year – two rate cuts – which has generally marked the floor in pricing. This suggests market pricing is about as hawkish as it can get and thus points to peak hawkishness.

While inflation pressures have remained at elevated levels, it is likely more difficult for markets to shift from two cuts to zero than it is to go from two to four cuts. Recall that the BoE’s interpretation of gradual easing is around 100bps of cuts over the next year. Though this is looking somewhat optimistic with only the February meeting showing a more than 50% probability of a cut.

Elsewhere, despite not showing up in the official jobs figures, alternative survey based measures have shown that the labour market is easing at a faster pace. This is important given the widely recognised quality issues with the national labour market statistics.

That said, with little room for a further hawkish repricing in UK rates, this provides a headwind for both GBP/USD and gilt yields.

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