(Bloomberg) -- A Bank of England rate cut next month is starting to look like an attractive outside bet.
A third national lock-down in the U.K. is overwhelming positive sentiment on the vaccine rollout, and threatening to drag the economy into a double-dip recession. As a result, expectations are rising the BOE will ease policy at its Feb. 4 meeting.
The widely held view that support is likely to come in the form of bond buying leaves less than two basis points of rate cuts priced into the overnight index swaps market for next month. Analysts at Goldman Sachs Group Inc. like the 4-to-1 payoff on a surprise move.
“The possibility of a 10-basis-points rate cut taking the Bank rate to zero suggests positive risk-reward” in betting on lower OIS rates at the February meeting, strategists including George Cole wrote in a client note.
A BOE cut next month isn’t their base case: Goldman forecasts more incentives for banks to lend under the Term Funding Scheme and a faster pace of bond purchases. Even so, the U.K. yield curve is likely to steepen and front-end rates to remain supported, since the central bank is due to release further research on negative interest rate policy, Cole wrote.