Market pushes BoE rate rise timing out. Way out.

This really hammers home just how far expectations of the first Bank of England rate rise have zoomed off into the distance. For the first time in more than four years, the Bank of England is expected to raise rates after the European Central Bank.

Yes, you read that right. ECB before BoE.

That’s the same ECB that is in the middle of a massive monetary easing programme, which it says will continue for at least another 18 months, until 2017, and maybe longer, writes Joel Lewin.

That’s the ECB with a deposit rate well below zero that is widely expected to cut even deeper into negative territory at its meeting next week.

As Frederik Ducrozet at Pictet points out, Morgan Stanley’s “months to first hike” indices show swaps markets expect the next BoE hike in 51 months, while the next ECB hike is expected in 48.5 months.

The last time swaps markets were pricing an ECB rise before the BoE was more than four years ago, in January 2012, according to Morgan Stanley’s indices.

At the start of 2016, markets expected the next BoE hike to come in 8.6 months. In just two months, that has risen to 51 months, the Morgan Stanley indices show. Before January, it hadn’t topped 20 months since August 2013.

Charts courtesy of Bloomberg

A sharp deterioration in market sentiment and inflation expectations, as well as fears surrounding the possibility that the UK will vote to leave the European Union, have pushed expectations of a BoE rate rise way into the future.

Expectations of the first ECB rise have also retreated, but not nearly as sharply. At the start of 2016, markets expected the next ECB tightening to come in 28.5 months, but has since risen to 48.5 months, the Morgan Stanley indices show.

Paul Hollingsworth at Capital Economics says:

With four months still to go, and the polls remaining close, Brexit remains a real possibility. Uncertainty surrounding the vote is another reason to think that market turbulence (and a weaker sterling in particular) could continue for a while longer, and provides another reason for the UK MPC to hold off from raising interest rates.