SONIA: Market-Implied Rate Cut Profile Still Seems Flat Despite Near-Term Risks

While flattening has dominated during the recent rally in SONIA futures, risk/reward still seems tilted towards a further extension of that move, at least in the medium-term.

• SONIA June ‘25/Dec ’25 (SFIM5/Z5) and Jun ‘25/Jun ’26 (SFIM5/M6) spreads are 10bp and 14bp below their respective January highs.
• We still look for cuts at the BoE’s February and May meetings, with ~42bp of easing now priced through the latter.
• Only ~28bp of cuts are priced through the remainder of the Bank’s 5 ’25 meetings beyond May, which continues to look a little flat to us.
• The BoE’s tone next week will be key for the short-term direction of travel, particularly after some of the more dovish MPC members became more emboldened at the December meeting (when 3 dissenters voted for a cut).
• It may take several more rounds of data and dovish rhetoric alongside the delivery of a rate cut to drive further flattening on the SONIA strip.
• The Bank should look through the expected near-term mechanical uptick in inflation.
• However, that, combined with macro risks (both at home and abroad), present hawkish risks to SONIA flatteners. 

Fig. 1: SONIA June ‘25/Dec ’25 (SFIM5/Z5) & Jun ‘25/Jun ’26 (SFIM5/M6) Futures Spreads

Source: MNI - Market News/Bloomberg