UK yields to move higher BoE rate hikes – Danske Bank

According to analysts from Danske Bank, the Bank of England could riserates as soon as August and they expect a gradual flattening of the UK yield curve.

Key Quotes:

“The Bank of England (BoE) did not increase its Bank Rate in May, as economic indicators surprised on the downside. However, we still believe the hiking cycle has been postponed, not cancelled. However, we think there will probably be fewer rate hikes than previously thought. We expect one hike in the second half of 2018 and one in 2019. The next hike may come as soon as August if economic data hold up but the probability has declined since the meeting, as the BoE will get only a few months more data, which may not be enough for the majority of the its members to feel comfortable about a hike. The next possibility would be the November meeting.”

“Consensus among analysts is that the BoE will hike in August, with the following hike in February 2019. Markets are priced more softly, with the probability of a rate hike in August at 35% (70% for a hike in November). However, markets have nearly priced in two full hikes by year-end 2019, which is fair.”

“We generally forecast higher yields across the curve and with the BoE expected to lift the front end much faster than the market’s pricing, we look for a gradual flattening of the 2y-10y and 5y-10y yield curves. We forecast yields on 2Y gilt at 1.40% in 12M and target yields on 10Y gilts at 2.00%.”