BOE: Will Governor Bailey vote for a December cut if income tax isn't raised?
Nov-14 07:57
- SONIA markets this morning are seeing the probability of a December cut moving from around 20bp priced at yesterday's close to around 19bp now with the curve seeing around 5bp less priced in in around a year's time (see STIR: Reports Re: Walk Back Of Income Tax Hike Drives Hawkish BoE Repricing at 7:43GMT).
- We think that if the data comes in line on the inflation side and we don't see a big reversal in the labour market print just ahead of the MPC decision that unless there is something explicitly inflationary in the Budget that there would still be enough evidence for Governor Bailey to vote for a December cut irrespective of any changes to income tax.
- And also note - the FT story isn't fully ruling out any changes to income tax, it is noting that the changes could be more via thresholds than explicitly via rates.
- As we noted earlier, moving the higher rate threshold by 10% would not hit the "working person" definition used by Treasury and would still raise GBP7bln (if not offset by NIC). That would still be a substantial tax increase, albeit the marginal propensity to consumer of those with higher incomes is less than that of lower incomes - so it would have less of an impact.
- Further out, it does slightly reduce the probability of rate cuts down the line - so the market is right to price a slightly higher terminal rate on this news. And there is still the elephant in the room of if this policy raises less money, what is going to raise money instead...?
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BOE: Ramsden due on panel at 9:00BST - subject is not monetary policy
Oct-15 07:53
- BOE Deputy Governor Dave Ramsden is due to speak on a panel at the Single Resolution Mechanism’s 10th Anniversary Conference in Brussels beginning at 9:00BST. There will be no text released but the event is being streamed here.
- The panel is not on monetary policy. It is entitled "Resilience without borders; Lessons and leverage from global cooperation." with the agenda noting that "This panel will explore the international dimension of bank resolution. Discussions will focus on global cooperation and cross-border challenges in the resolution framework."
- We therefore think it would be unlikely (but not impossible) for Ramsden to discuss monetary policy this morning. If he does we would expect him to remain on the dovish side and keep the door open to a cut. His recent comments have shown that he remains concerned about the labour market and he has in the past noted how much attention he pays to wage settlement data when deciding his vote. Yesterday's labour market data showed a notable slowdown in private regular wage growth but showed some upward revisions to recent payroll growth - pointing to a slowing but not disastrous labour market. See our full review here.
- Also note that Governor Bailey (the likely swing voter in Q4) spoke last night and said that "I've been saying for some time that I think we're seeing some softening of
the labour markets...and that broadly is the story that I pick up. I think we saw it in the numbers this morning." He added: "On the other hand, balancing that off, we've got inflation above target...so balancing these two things is the thing that we're having to do." He wasn't any more specific in his comments Tuesday on his read of the latest data but we think this shows that he maintains optionality for a Q4 cut.
SONIA OPTIONS: Ratio Call Spread
Oct-15 07:52
SFIZ5 96.20/96.30cs 1x2, bought for 0.25 in 2.5k.
STIR: SFIZ5/Z6 Hits Fresh '25 Low
Oct-15 07:51
{GB} STIR: The dovish repricing in GBP STIRs has pushed the SFIZ5/Z6 spread to the lowest level of ’25.
- The spread has traded as low as -38.0, with the next level of downside interest located at the ’24 low (-40.5).
- The move has been driven by the softer-than-expected UK labour market report and global developments (risk-off global trade disputes, comments from Fed Chair Powell and political developments in France).
- A reminder that BoE Governor Bailey pointed to the trade off in managing inflation and a softening labour market late on Tuesday.
- Still, he steered clear of any guidance when it comes to future interest rate decisions, heightening the impact of next week’s inflation data.
- A dovish CPI report would likely drive further weakness in the spread.
- That is assuming the market would price a deeper cutting cycle, as opposed to just pulling forward rate cut expectations
- BoE-dated OIS currently prices 10bp of easing through year-end vs. the 4-5bp level that became the norm in recent weeks.
- SONIA futures-implied terminal rate pricing last 3.45% vs. 3.60% in late September
Fig. 1: SONIA Dec ‘25/Dec ’26 Futures Spread (SFIZ5/Z6)
Source: MNI - Market News/Bloomberg Finance L.P.
