Today’s BoE rate decision has been subject to intense gyrations in terms of expectations. Economists at Credit Suisse analyze GBP outlook ahead of the meeting.

EUR/GBP to move towards 0.8450

Sonia-implied peak rate sits now at 5.85% vs 6.50% pre-CPI. We would be surprised if GBP were to react in a very negative fashion if only a 25 bps rate hike is delivered, given the correction that has already taken place. 

It would likely need an exceptionally dovish BoE inflation report and/or comments by Governor Bailey to cause more damage, something we struggle to see given that the central bank is still trying to explain why its original projections were so off the mark. 

At the same time, if the BoE does go ahead and deliver a 50 bps rate hike, the market could be caught wrong-footed after marking down UK rates so aggressively recently, and it may require a terminal rate closer to 6.00% to be priced in again. 

Given this asymmetry, we prefer to stick to our guns and continue to call for EUR/GBP to move towards our 0.8450 target, a view that is also pro-carry in a low-vol market environment.