BoE's policy divergence mispriced

After the Fed's decision not to hike in September and the consequent stream of disappointing data points in the U.S. and elsewhere, the market has pushed out its expectations of the BoE's first hike to 1Q17. 

"The front end has flattened dramatically to the point where we are now pricing about one hike a year from 2017", says Bank of America Merrill Lynch. 
Even accounting for the change in our house call to May next year, the levels the market has reached look inconsistent with our view of the path of policy tightening by the BoE. 

In assessing how best to oppose this flattening, the underpricing of the policy divergence between the U.K. and Europe is found as the most compelling expression of the current views.

"A year from now, we expect the BoE to have implemented its first rate hike and to be close to announcing its second. This we see as delivering a re-steepening of the curve, or at least maintaining the existing steepness. When we expect policy divergence between the two central banks to be greatest, the market is pricing the 2s5s part of the swap curve to be equally steep in both markets", added  Bank of America.