PIMCO: Bank of England reaction
Peder Beck-Friis, Economist at PIMCO, comments on yesterday’s Bank of England (BoE) decision:
'The BoE left rates unchanged at 3.75%, in line with expectations, with the vote split remaining 6-3. Pill, Mann and Greene again voted for a hike. However, the tone was more hawkish, with the MPC expressing increased concern about inflation risks.
The outlook remains highly uncertain and, should energy prices fall before November, the MPC could remain on hold. Absent such a reversal, however, a November hike now appears likely, with a further move possible early next year.
While there are still few signs of meaningful spillovers from energy prices into core inflation, headline inflation could approach 4% in early 2027. In that scenario, the MPC may feel compelled to validate at least some of the market's hawkish repricing to avoid perceptions that it is falling behind the curve, particularly as other central banks continue to tighten policy.
Front-end rates are now pricing in around four hikes over the next year. We think that reflects a degree of risk premium, and such an outcome would likely require a larger and more persistent increase in energy prices, or much greater spillovers into core inflation, than we currency expect. As a result, we continue to view gilts as attractive within a diversified portfolio of global duration exposures.
For markets, the more significant announcement was arguably the updated quantitative tightening framework. The BoE indicated that it does not intend to sell bonds maturing in 2049 or later over the coming years, prompting a sharp rally at the long end of the curve. Thirty-year gilt yields fell by around 12 basis points on the day.'