(Bloomberg) -- The Bank of England needs to cut rates more aggressively than markets are pricing, given the nation’s economic woes and faster easing at other major central banks, said Tim Graf, head of EMEA macro strategy at State Street Global Markets.
Sticky underlying inflation gauges mean the BOE is expected to take a cautious approach and keep rates on hold at 5% on Thursday.
But Graf says the central bank will need to pick up the pace and ultimately sees 2.5% as an appropriate neutral level for the UK. That compares with a rate of about 3.25% implied by market pricing in two to three years from now. If the economy looks to be headed for a hard landing, the BOE may be forced to cut as low as 1.5%-2%, he said.
“It is priced to remain tight for three years and that strikes me as just off-the-charts crazy,” Graf said in an interview with Bloomberg TV. “The Bank of England is behind the curve.”
Graf said he favors short-dated gilts and short sterling positions, in particular against the yen.
Sterling was trading stronger against the dollar and the Japanese currency on Thursday in the wake of the Federal Reserve’s 50 basis-point cut. Yields on rate-sensitive two-year gilts fell three basis points to 3.87%.
“Rates have been way above neutral for two years,” Graf said. “That’s five years of tight monetary policy. What is that going to do to the economy?”
--With assistance from James Hirai.
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