As highlighted in our preview for the January Bank of England MPC meeting, market analyst views were split on whether the MPC would leave rates unchanged or cut by 25bp. As a result, the market was pricing in approx. a 50% chance of a cut for that meeting with 33bp of cuts fully priced in by year end 2020. Ultimately the BoE did not cut and the vote on whether to cut stayed at 7-2, inline with the December meeting. As a result, the market has repriced it’s expectations for future rate cuts quite sharply.
The market retains a dovish bias to its expectations – the next move is expected to be a cut rather than a hike, but now the market sees limited chance of a cut at the March meeting, is 50/50 for a cut at the next Monetary Policy Report meeting in May while just 26bp of cuts are priced in by year end – 7bp less than was the case earlier this week.
The table and graphs show what the financial markets anticipate (or are “pricing in”) for future interest rate policy from the Bank of England’s MPC – ie base rate hikes and/or cuts - and how this has changed over recent days and weeks. This provides a great barometer of how the markets are interpreting the impact of recent news, speeches, data and events on the outlook for monetary policy.
To create the table we analyse the OIS markets (see details below). The table shows, for each future MPC meeting: the level of the OIS market, how much that implies the Bank of England rate will move up or down from current levels by the time of that meeting (in basis points) and how many hikes or cuts that is equivalent to. The table also details how much these expectations have changed over the last day, week and month.
If, for example, the table shows the MPC will lower rates 12.5bp by the December meeting (ie half a 25bp cut), this implies the market thinks there is a 50% chance of an interest rate cut at, or before, the December meeting.
Interpreting the Data
There are a few different ways to determine what the market expects for future interest rates moves by central banks. All involve analysing short term interest rate markets and the options vary a little by country. We generally prefer using the OIS (overnight indexed swap) market - specifically the OIS swap dated to a specific central bank meeting. The dates on these swap contracts exactly match the central bank policy implementation dates allowing for an accurate reading. The difference between the interest rates implied by these OIS contracts and the actual current overnight interest rate can be interpreted as the expectations for the direction and magnitude for that central bank’s future interest rate policy change. For the BoE MPC we use MPC Dated Sonia contracts.
The market retains a dovish bias to its expectations – the next move is expected to be a cut rather than a hike, but now the market sees limited chance of a cut at the March meeting, is 50/50 for a cut at the next Monetary Policy Report meeting in May while just 26bp of cuts are priced in by year end – 7bp less than was the case earlier this week.
The table and graphs show what the financial markets anticipate (or are “pricing in”) for future interest rate policy from the Bank of England’s MPC – ie base rate hikes and/or cuts - and how this has changed over recent days and weeks. This provides a great barometer of how the markets are interpreting the impact of recent news, speeches, data and events on the outlook for monetary policy.
To create the table we analyse the OIS markets (see details below). The table shows, for each future MPC meeting: the level of the OIS market, how much that implies the Bank of England rate will move up or down from current levels by the time of that meeting (in basis points) and how many hikes or cuts that is equivalent to. The table also details how much these expectations have changed over the last day, week and month.
If, for example, the table shows the MPC will lower rates 12.5bp by the December meeting (ie half a 25bp cut), this implies the market thinks there is a 50% chance of an interest rate cut at, or before, the December meeting.
Interpreting the Data
There are a few different ways to determine what the market expects for future interest rates moves by central banks. All involve analysing short term interest rate markets and the options vary a little by country. We generally prefer using the OIS (overnight indexed swap) market - specifically the OIS swap dated to a specific central bank meeting. The dates on these swap contracts exactly match the central bank policy implementation dates allowing for an accurate reading. The difference between the interest rates implied by these OIS contracts and the actual current overnight interest rate can be interpreted as the expectations for the direction and magnitude for that central bank’s future interest rate policy change. For the BoE MPC we use MPC Dated Sonia contracts.
