(Bloomberg) -- Vanguard Asset Management Ltd sees a 50% chance that the Bank of England will surprise markets next week by keeping interest rates on hold as it evaluates the UK government’s first budget.
UK assets have tumbled this week after the Office of Budget Responsibility forecast robust price pressures for years to come in response to the Labour Party’s spending plans. That prompted traders to push back expectations for BOE easing, sparking a sharp selloff in bonds and stocks, while the pound has weakened on concern about rising borrowing.
The BOE may flag these risks as early as next week when it updates its inflation forecasts, said Ales Koutny, head of international rates at Vanguard. This also raises the chances that policymakers will hold rates, he added.
“We can’t discard the option that the BOE chooses to stay on hold after accounting for the changes in its forecasts,” said Koutny, who oversees $1.8 trillion in Vanguard’s actively managed assets. “The markets still view a cut from the BoE next week as a given. I see it more as 50/50.”
Rates markets are pricing nearly four quarter-point cuts by the end of 2025 in the wake of Wednesday’s budget, compared with five just a week ago. A hold next week would flatten the gilt yield curve, Koutny said.
The pound is set to post its fifth-straight week of losses, its worst run since 2018, as the post-budget selloff has prompted investors to trim their bets for the pound to gain more. Despite the slump, the pound remains the best-performing G-10 currency this year.
A hold next week from the BOE would prompt the pound to strengthen “quite a bit,” Koutny said, adding that he would consider adding to his overweight position in the currency on such an outcome.
The UK currency could break through 83 pence per euro and rise to its highest in more than two years, while gains versus the dollar would be less certain, given that the pair would more likely be driven by next week’s US election results, he said.
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