BOE to Disappoint Dovish Bets in 2026:  3-Minute MLIV - video Dailymotion

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00:00I'm slightly more bearish probably than Ven is on the euro for reasons I've kind of

00:03stated, you know, I mean, for example, I don't really buy into this ECB rate hike story. I just

00:08don't think, you know, we really need to start pricing that at the moment. We're at 2%. We're

00:13not at negative or 0% interest rates. And, you know, there's a lot of optimism priced into the

00:18European growth outlook next year. I mean, Germany's particular case in point, we saw that

00:22Bundesbank report last week, which is particularly bullish, but then some survey data from Bloomberg,

00:27that's been a little bit more pessimistic. And then also, you know, you've got places like

00:32France. Yes, they've kind of kicked the can into 2026. And I think there's a bit of market

00:36relief that the political situation is actually stable. So the market has been concerned about

00:41is the risk of snap legislative elections or presidential elections. So yes, there's some

00:46reprieve on that front. But the actual fiscal situation in France is still particularly perilous

00:51because, you know, they're looking to cut their deficit to 4.7% of GDP. These latest measures

00:56may get it to 5.3, even 5.4. That's not really an improvement. And, you know, if the euro gets

01:03swept up in this, you know, global rate story with rates moving higher, if it does happen,

01:07there's not necessarily a positive for the euro. I mean, those French funding pressures

01:11are going to be even more extreme. And there's been some good work by Bloomberg noting that

01:15with France shorting their maturity profile, that leaves them more vulnerable if rates do

01:20go higher. So high rates may not even be a positive for the euro if they do come.

01:24Okay. Yes, that's an important, that link between rates and the sovereign story. Let's

01:29pivot to the UK, shall we, Adam, because we've had a lot of conflicting conversations actually

01:34about gills. So let's start with your Bank of England outlook. What are you expecting

01:37to see there? Because there's still pricing in of rate cuts, but not everyone's quite so

01:42convinced.

01:43Yeah. When it comes to rate cuts, I'm more the singular than the plural. I think, you know,

01:46we got that rate cut last week, but it was very hawkish in nature. And I think what we

01:50saw in the minutes was very telling. So even though we saw that soft inflation data the

01:54day before, those contingent of hawks on the board just aren't willing to budge. They're

01:59still concerned about the strength of underlying inflation. They're even questioning whether

02:02the policy is actually even that meaningfully restrictive. Then in the minutes, we also

02:06saw the Bank of England hint that the closer we get to neutral, which, okay, we don't necessarily

02:11know where that is. You know, Bloomberg thinks it could be around 3.5%, which would,

02:15you know, suggest 25 basis points left to get there. But the Bank of England said those

02:19decisions are becoming more contentious, which is kind of a hint to say you can't really expect

02:24too much more from us at this juncture. And I think you'll see some of the cautious cutters

02:28like Bailey, Breeden, they'll move back into the unchanged camp in February.

02:32And Adam, you can play the ref now, because we've had lots of different views on whether

02:36we should be nervous about that backloaded fiscal consolidation that was promised by the

02:41Chancellor in the budget. The last guest says, yes, you should be worried about it.

02:46Where do you land when it comes to gilts? Well, I wrote a column a few weeks ago being

02:50relatively bearish on gilts. So, I'm still very much in that camp. I think there's a

02:54few things that investors need to be concerned about. Like I just mentioned, they're not going

02:58to get support from the monetary policy channel. If global rates keep going higher, that's going

03:03to be a headwind for gilts. Then also, political risk has not gone away. Yes, there's a bit of

03:07reprieve from the budget. But I think the May local elections could be pretty telling. Labour

03:12are not polling well. I don't think it's unfair to say the market is not in love with

03:17Starmer and Reeves, but they're tolerating them. But I think there's a big fear of what

03:21could potentially come next if Starmer's premiership is to be challenged. And if you look at betting

03:27exchanges, the most likely year for Starmer to step down would be this year. And then like

03:32you said, exactly, the back-ended nature of some of those fiscal measures, that's a real

03:36concern as well. Because a lot of those are coming in in 2029, which will be the run-up

03:41to the election. And history suggests that it's not a particularly good policy for a

03:46government to start jacking up taxes in the run-up to an election. And then also, you

03:51know, some of the assumptions for the OBR, which are underpinning the fiscal headroom,

03:55they're particularly optimistic on consumption. And, you know, the UK economy isn't exactly

04:00running hot at the moment. And I think there's a Bloomberg article a few weeks ago suggesting

04:05that if, you know, the UK economy does falter, these consumption forecasts are not met. That

04:10could blow a £40 billion hole in the public finances. And the market just isn't pricing

04:14that.

BOE to Disappoint Dovish Bets in 2026: 3-Minute MLIV

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