CORRECTS-MNI POLICY: BOE Sees Market Repricing As Orderly

(Corrects story published earlier on March 31 to make clear that the BOE is publishing the Financial Policy Committee Record, not the Financial Stability Report )

The Bank of England is likely to state that the surge in gilt yields following the outbreak of the Iran war has been orderly when it publishes its Financial Policy Committee Record on Wednesday, but that repricing in both bond and rates markets has probably overshot, MNI understands.

There is little sign of the forced selling seen in the wake of 2022’s mini-budget debacle, and the Bank could also note that the shift in gilt market structure, away from long-term holders and towards greater participation by hedge funds and other short-term investors, could amplify any move in implied rate expectations. (See MNI INTERVIEW: Must Tackle Hedge Fund Debt Risk - BIS's Gelos)

Sharp market moves saw 10-year gilt yields rising above 5%, while implied rate expectations briefly spiked upwards to factor in around 100 basis point of BOE tightening in the rest of 2026 since Bank Rate was held at 3.75% on March 19, before dropping back to show an increase in Bank Rate of 60 basis points.

Governor Andrew Bailey, who will hold a press conference on Wednesday, told the BBC that the rates repricing was "getting ahead of where the committee is" after a sharp repricing following what was interpreted as a hawkish statement. He stressed the volatility of the situation, and said that a pause had been the right decision.

BOE MPC WARY

While the Monetary Policy Committee’s nine-zero vote in March was its first unanimous decision since September 2021, views expressed since suggest that divisions persist beneath the surface. (See MNI POLICY: Iran War Shock To Magnify BOE's MPC Fractures)

Deputy Governor for Financial Stability Sarah Breeden emphasised the two-sided nature of risks in an event at the Resolution Foundation thinktank last week, warning against simplistic comparisons with the inflation spike and policy tightening after the 2022 Ukraine shock. She pointed to labour market slack and a "lacklustre" outlook for activity. 

Alan Taylor similarly highlighted the risks from slowing wage growth and a weakening labour market at a speech in New York on Thursday, setting a high bar to future hikes.

Other MPC members' recent commentary largely reflected their pre-shock arguments, with Chief Economist Huw Pill saying in a speech in Skopje that he "places more weight on structural change in price and wage setting" as the baseline explanation for higher inflation persistence than implied by standard models.

Megan Greene restated her concerns over elevated inflation but said at an event last week that she "wasn't tempted to hike" at the March meeting.