Investing.com — The Bank of England has seen the sharpest repricing among major central banks this month as markets react to rapidly changing energy conditions in the Middle East, according to Deutsche Bank strategists.
At the end of February, the BoE was priced for over two full rate cuts through the end of 2026. As of Tuesday morning, just over 10 basis points of cuts are now priced for the entire year.
The repricing reflects concerns that sticky inflation expectations could prevent the BoE from looking through the energy shock and continuing to cut rates.
At the end of last month, the BoE was priced comparatively dovishly to peers both in absolute terms and relative to the spot real rate, measured by the policy rate minus the six-month annualised change in core CPI.
The dovish pricing was explained by expectations that inflation was set to fall in coming months in the UK, continued fears over the labour market, and the Monetary Policy Committee’s more dovish than expected stance at their most recent meeting, where they voted 5-4 to hold rates.
Fixed income, commodity, and currency markets have all experienced high volatility so far in March as global markets digest the rapidly changing energy situation in the Middle East. Nearly all G10 central banks have been repriced in a hawkish direction, but the BoE has seen the biggest shift.
According to Deutsche Bank’s analysis, there is now close to no dovish risk premium for the MPC relative to peers on a simple inflation-adjusted real rate basis.
From a currency perspective, the terms of trade impact has been the dominant driver of relative performance. However, the magnitude of the UK repricing versus peers has likely combined with an unwind of short positioning to support the pound in the short term.
A continued fall in energy prices and reversal in front-end rates could see that source of support also reverse, the strategists noted.